<PAGE>   1

================================================================================
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   Form 10-K
     (Mark One)
   [x]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended August 31, 1996
                                       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)

                    Delaware                               75-2268672
         (State or other jurisdiction of                (I.R.S. Employer
         incorporation or organization)               Identification No.)

         5005 Riverway Drive, Suite 550               
                 Houston, Texas                               77056
    (Address of principal executive offices)               (Zip Code)

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

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

          Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class:                       Name of exchange on which registered:
--------------------                       -------------------------------------
  Common Stock,                            National Association of Securities
  $.01 par value                           Dealers Automated Quotation System
                                           Boston Stock Exchange

       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 December 4, 1996 is  12,135,997 inclusive of 289,873 shares held as treasury
stock.

         The aggregate market value of the stock held by non-affiliates of the
Registrant as of December 4, 1996 was approximately $18,242,000.
        
                               -----------------

                     DOCUMENTS INCORPORATED BY REFERENCE

                   Document                               Form 10-K Part
                   --------                               --------------
Definitive Proxy Statement for 1997 Annual Meeting           Part III
================================================================================
<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
July 1995, Larry D. Armstrong became President and Chief Executive Officer of
the Company, succeeding Mack Ponder, the founder of the Company.  Under Mr.
Armstrong's leadership, a new business strategy was implemented in 1996 that
focused on improving Ponder's domestic and international market position by
pursuing opportunities for acquisitions in strategic oil and gas markets and
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 well.  Likewise, equipment can be
accidentally dropped in 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.  The equipment is generally rented but 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 their fishing tool equipment and the proper
selection and assembly of the fishing string.  The fishing string consists of
jars, subs, overshots (external), spears (internal) and other tools for
removing the item or the "fish" from the well.

         The Company 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 where 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.

<PAGE>   3

         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 activity generally occurs during the early months of the year due to 
inclement weather.

         PATENTS AND LICENSES

         The Company has followed a policy of seeking U.S. and foreign 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.  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

         During the 1996 fiscal year, the Company made the following
acquisitions:

         In September 1995, the Company acquired Armstrong Tool, Inc. (Fort
Smith, Arkansas) from Larry D. Armstrong, the President and Chief Executive
Officer of the Company, and his wife.  The consideration for the assets of
Armstrong Tool, Inc. consisted of the issuance of a promissory note for
$400,000 to Mr. Armstrong and the assumption by the Company of approximately
$450,000 of liabilities.
         
         The Company acquired certain real property, vehicles and rental tools
and equipment from Apex Tools, a sole proprietorship, in October 1995 for
$200,000 cash and a promissory note payable in two installments of $200,000,
due March 15, 1996 and 1997.  Apex Tools is located in Healdton, Oklahoma, and
provides fishing and rental tool services in South Central Oklahoma and North
Texas.

         During the third quarter of fiscal 1996, Ponder completed the
acquisitions of Runyon Oil Tools, Inc. (Olney, Illinois), DiKor, Inc. (Carmi,
Illinois) and C & F Fishing Tools, Inc. (Maysville, Oklahoma) in separate
transactions for an aggregate of $283,425 and 331,455 shares of the Company's
restricted common stock.  Each of these companies was engaged in the business
of renting fishing tools throughout their geographic regions.

         Effective April 1, 1996, the Company expanded its operations into the
North Sea region by acquiring Panther Oil Tools (UK), Ltd., an England
corporation ("Panther"), and substantially all of the assets of Villain, Ltd.,
a Guernsey corporation ("Villain").  Panther and Villain were engaged in the
manufacture, sales and rental of fishing tool equipment in the North Sea
region.  The shareholders of Panther received 1,200,000 shares of the Company's





                                      -2-

<PAGE>   4

restricted common stock and $250,000 cash in exchange for all of the issued and
outstanding capital stock of Panther.  Additionally, $1,000,000 in cash was
paid for the acquisition of substantially all of the assets of Villain.
The assets acquired include leased property, goodwill, intellectual property
and equipment utilized in the rental of fishing tools.  Ponder owns and
operates the facilities and equipment acquired through its wholly owned
subsidiary, Ponder Energy Services, Inc., a Delaware corporation.

         In June 1996, Ponder acquired substantially all of the assets of
Reeled Tubular Components, Inc., a Texas corporation ("RTC"), including the
intellectual property rights to an obstruction removing device.  Ponder paid
$50,000 cash and 20,000 shares of the Company's restricted common stock for 
the assets of RTC.

         The Company also acquired, effective as of July 1996, all of the fixed
assets of Bosco Fishing and Rental Tools, Inc. of Laurel, Mississippi.  The
consideration for the acquisition consisted of an initial $200,000 cash payment
and the assumption by the Company of approximately $1,200,000 of liabilities.

         In August 1996, the Company acquired all of the issued ordinary shares
of Prime Pipe Limited, a United Kingdom company, for approximately $105,000 and
an obligation to issue 4,650 shares of restricted common stock of the Company.
Prime Pipe is a supplier of drilling pipe and other equipment to oil and gas
operations in the North Sea region.

         In May 1996, the Company signed a letter of intent to acquire Abilene,
Texas based G&L Fishing Tool Company for $4,000,000 and a $5,000,000 short-term
note.  At August 31, 1996, approximately $1,156,000 was in other assets on the
Company's consolidated balance sheet related to this pending acquisition,
including a $1,000,000 forfeitable deposit.  Management of the Company
anticipates that this acquisition will be completed by June 1997.

         In November 1996, the Company entered into a joint venture formation
agreement with Drilling Tools International, Ltd., a Gibraltar corporation 
("DTI") pursuant to which DTI will contribute all of its assets and liabilities
and the Company will make an equivalent contribution of assets.  The joint 
venture is to be based in Dubai, United Arab Emirates and be formed under the
laws and regulations of the Jebel Ali Free Zone Authority.  Until such time as
the joint venture is formed, the Company intends to lease to DTI the assets it
intends to contribute to the joint venture.

         Information concerning these acquisitions is contained in Note 16 of
the Notes to Consolidated Financial Statements.

         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,





                                      -3-

<PAGE>   5

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

         FOREIGN OPERATIONS

         Information by geographic location for 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:

<TABLE>
<CAPTION>
                                                       Year Ended
                                                        August 31,
                                                          1996     
                                                       -----------
         <S>                                           <C>
         Net Sales-                                   
         Domestic                                      $10,857,215
         Foreign                                         1,103,538
                                                       -----------
                                                      
                          Total                        $11,960,753
                                                       ===========
                                                      
         Loss from continuing operations-             
         Domestic                                      $(5,122,718)
         Foreign                                          (147,773)
                                                       -----------
                                                      
                          Total                        $(5,270,491)
                                                       ===========
                                                      
         Identifiable assets-                         
         Domestic                                      $21,552,446
         Foreign                                         6,349,630
                                                       -----------
                                                      
                          Total                        $27,902,076
                                                       ===========
</TABLE>

         The Company's foreign operations relate to Panther and Villain as
discussed in Note 16 to 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 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.





                                      -4-

<PAGE>   6

         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.
Safety training programs are conducted on a regular basis.  There can be no
assurance that the cost of compliance with current environmental and safety
regulations or future changes in such laws and regulations will not have a
material adverse effect on the Company's operations.

         ENVIRONMENTAL MATTERS

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

         EMPLOYEES

         As of December 4, 1996, the Company had approximately 180 full-time
employees, which does not include the supervisors who are independent
contractors.  None of the Company's employees belong to any labor unions, and
the Company believes its relationship with its employees is good.

         EXECUTIVE OFFICERS OF THE REGISTRANT

         The current executive officers of the Company, their names, ages,
positions and tenure with the Company as of December 4, 1996 are as follows:

<TABLE>
<CAPTION>
                                                                        Officer
       Name                Age           Position                        Since
       ----                ---           --------                        -----
<S>                        <C>      <C>                                  <C>
Larry D. Armstrong         56       President and Chief                  1995
                                    Executive Officer
                                    
Eugene L. Butler           55       Executive Vice President             1996
                                    and Chief Financial Officer
                                    
Frank J. Wall              41       Executive Vice President of          1990
                                    Operations
                                    
O. A. "Buddy" Jackson      58       Executive Vice President of          1996
                                    Marketing
                                    
Mark R. Paisley            43       Secretary                            1995
                                    
Gerald A. Slaughter        53       Vice President and Controller        1996
</TABLE>





                                      -5-

<PAGE>   7

         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 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 20 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 KBK Financial, Inc. as collateral for certain of the Company's
long term debt.  See Note 6 of Notes to Consolidated Financial Statements.  The
Company believes that its facilities are generally adequate for their
respective operations, and that the facilities of the Company are maintained in
good repair.  The Company is lessee under a number of cancelable and
noncancelable leases for certain real properties.  See Note 11 of Notes to
Consolidated Financial Statements.
         
ITEM 3.  LEGAL PROCEEDINGS

         In 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.  The Company has requested that the Commission not
follow the recommendations of the staff on the grounds that its accounting
treatment with respect to the Azerbaijan operations was appropriate under the
then existing circumstances and that the revenue was recognized in good faith.
Recently, the staff indicated it would not recommend action concerning the
Exchange Act filings but did intend to recommend that the Commission take
action with respect to the press release.  That recommendation is currently
pending and at this time there has been no indication as to what action the
Commission will take.

         The Company is a defendant in a lawsuit by a former employee seeking
damages for wrongful termination.  The suit was filed on December 6, 1993.  The
suit seeks approximately $317,000 in unpaid wages and value of $142,695 for
38,052 shares of stock he would have earned during the remainder of his
contract term.  In May 1995, the former employee sought to enjoin the Company
from conducting an auction sale of certain assets; as a result of those
injunctive proceedings, the Court ordered that $200,000 of the proceeds from
the auction be tendered into the registry of the Court to satisfy any possible
adverse judgment against the Company.  The Company asserts that the former
employee was properly terminated under the terms of his contract and is
vigorously contesting the claim and believes that it has meritorious defenses
regarding this matter.

         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.  The plaintiff asserts damages in an amount in excess
of $50,000, attorney's fees and costs and seeks an order





                                      -6-

<PAGE>   8

compelling the Company to convert the plaintiff's debentures into common stock.
The Company is contesting the plaintiff's claims and has responded to the
plaintiff's complaint by filing counterclaims and third-party claims against
the plaintiff, the Company's other convertible debenture holders and the
placement agent on the convertible debenture offering alleging various
violations of the Securities Exchange Act, common law fraud, civil conspiracy,
negligent misrepresentation, breach of contract, breach of fiduciary duty,
negligence, indemnification and seeking a declaration that the Company has no
obligation to convert the debentures and no liability for failure to so
convert.  Also, in August 1996, an action was filed in the United States
District Court for the Northern District of Illinois, Eastern Division, by two
other convertible debenture holders of the Company who allege that the Company
breached an obligation to convert certain debentures held by the plaintiffs
into the Company's common stock.  The plaintiffs seek a declaratory judgment
setting forth the rights and liabilities of the parties and an award of shares
of common stock or an undisclosed amount of money allegedly due them.  The
Company is contesting plaintiffs' claims and has removed the action to federal
court and has moved to transfer it to the Western District of New York pursuant
to a forum selection clause in the agreements between the parties.  The
plaintiffs have recently agreed to the transfer of the action to the Western
District of New York.

         The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business.  Although no assurances can be
given, the Company believes it has meritorious defenses to all of the above
actions and intends to defend itself vigorously.  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 has accrued $500,000 at
August 31, 1996, as its estimate of costs it expects to incur in defense of the
above actions.

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 December 4, 1996, there were approximately 2,000 beneficial
owners of the Company's common stock which is traded on the NASDAQ Small Cap
System under the symbol "PNDR".  The Company's common stock is also listed on
the Boston Stock Exchange.  The following table sets forth, for the calendar
periods indicated, the range of high and low closing prices for the Company's
common stock, as reported by the NASDAQ Small Cap System:




                                     -7-

<PAGE>   9


<TABLE>
<CAPTION>
                                           1996                                      1995                 
                           -------------------------------------   ---------------------------------------

                                High              Low             High               Low
                               ------            -----           ------             -----
 <S>                           <C>               <C>             <C>               <C>
 First Quarter                 $1-5/8            $3/4            $3-7/8            $1-11/16

 Second Quarter                 4-1/16            1               2-1/16            31/32

 Third Quarter                  6-1/4             3-13/16         2-1/8              23/32

 Fourth Quarter                 4-7/8             1-5/16          1-17/32            11/16
</TABLE>


         The closing price of the Company's common stock on December 4, 1996
was $1-27/32.

         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 the Company's new 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.

                            OPERATING STATEMENT DATA


<TABLE>
<CAPTION>
                                                                        Years Ended August 31
                                      -------------------------------------------------------------------------------------------
                                             1996              1995             1994             1993              1992  
                                           --------          --------         --------         --------          --------
 <S>                                       <C>               <C>              <C>              <C>              <C>
 Tool rentals and sales                    $11,960,753       $6,756,738       $7,634,902       $8,719,352       $12,262,070

 Loss from continuing operations            (5,270,491)        (440,532)      (1,567,034)      (1,279,860)       (1,890,239)

 Income (loss) from discontinued             
 operations                                  1,378,418       (3,790,911)      (1,531,642)               -                 -

 Cumulative effect of change in              
 accounting principle                                -        1,139,780                -                -                 - 

 Net loss                                   (3,892,073)      (3,091,663)      (3,098,676)      (1,279,860)       (1,890,239)

 Income (loss) per share-Continuing              
 operations                                      $(.60)           $(.07)           $(.25)           $(.20)            $(.36)

 Discontinued operations                           .16             (.59)            (.24)               -                 -

 Change in accounting principle                      -              .18                -                -                 -

 Net loss                                         (.44)            (.48)            (.49)            (.20)             (.36)
</TABLE>




                                     -8-

<PAGE>   10


                               BALANCE SHEET DATA

<TABLE>
<CAPTION>
                                                                              August 31
                                      -------------------------------------------------------------------------------------------
                                                1996             1995             1994             1993              1992  
                                              --------         --------         --------         --------          --------
 <S>                                         <C>              <C>             <C>                <C>              <C>
 Working capital (deficit)                   $1,196,789       $1,209,627      $(3,388,984)        $425,140       $(1,166,915)

 Total assets                                27,902,076        6,815,177       10,829,276       13,554,999        15,630,746

 Long-term debt                               4,148,207        2,343,012                -        2,450,000                 -

 Stockholders' equity                         7,012,520        2,311,928        5,406,665        8,508,415         9,751,153

 Book value per common share                       $.59             $.36             $.85            $1.33             $1.46
</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, 1996.  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 oil field 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 oil
field equipment such as pressure control equipment, tools, pipe and tubing used
in the drilling, completion and workover of wells.  Ponder currently has 20
locations domestically and two internationally 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 have great potential.
Instead, the project was a financial disaster, causing management and the Board
of Directors to seek a new direction with a new strategy.  It started this new
direction by hiring Larry D. Armstrong as President and acquiring his company,
Armstrong Tool, Inc.  Mr. Armstrong commenced a new strategy of growth by
acquisition and internal expansion.

         Ponder's strengths were its history, reputation, quality of service
and its people.  Despite this, 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 1996 management raised over $12 million in cash from financing 
activities including the sale of convertible debentures and common stock. 
Subsequent to year-end, Ponder completed a new $10 million financing agreement
to pay off existing bank debt and provide additional working capital for
continuing growth.  Ponder has acquired 10 companies, including Armstrong Tool,
Inc. and has 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.  The Company also recently signed an agreement to form a joint venture
for operations in the Middle East.  Revenues were nearly $12 million for the
year ended August 31, 1996 and are almost  double compared to last year, with
1996 fourth quarter revenues approaching  $5 million.




                                     -9-

<PAGE>   11

         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 the past year has allowed for much higher prices in 1996 than the
average prices for the past several years.  World oil prices have been in the
mid to low $20's per barrel for several months and many industry analysts are
forecasting this situation to continue in 1997.  These favorable market
conditions should continue and allow Ponder to continue its growth and return
to profitability.

         FINANCIAL CONDITION

         In November 1996, the Company completed a $10 million financing
agreement with KBK Financial, Inc.  The agreement includes a $4 million
Revolving Receivable Facility, a $2.5 million Revolving Credit Note and a $3.5
million Term Note.  The Receivable Facility is a two year facility that is
based 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 will be used to acquire capital
assets to expand the 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 will be used to
pay off existing bank debt of $3 million, with the balance being used to
acquire capital equipment.  This loan agreement was completed subsequent to
year end but is significant to the liquidity of the Company and its continuing
expansion program during 1997.

         In April 1996, the Company raised approximately $10 million, net of
fees, by issuing eight percent Convertible Debentures.  These debentures are
convertible into Common Stock, subject to defined conversion factors, and the
balance at year end was $9,150,000.

         The Company acquired approximately $14 million of property and
equipment during the year.  The sources used to purchase these assets were 
provided primarily from securities issued and funds received on the convertible
debentures issuance.

         Working capital was approximately $1.2 million at August 31, 1996 and
1995.  The current ratio at year end was approximately 1.2 to 1.0 compared to
1.6 to 1.0 last year.  The long-term debt (assuming the conversion of the
convertible debentures) as a percent of total capitalization was 26% at year end
compared to 56% last year.  The overall liquidity of the Company has improved
significantly in 1996 compared to 1995.  The Company will have approximately $5
million available under its financing agreements after paying off the bank debt
and certain payables outstanding at August 31, 1996.

         Management believes the combination of working capital, the unused
portion of existing credit facilities and anticipated cash flows from
operations provide the Company with sufficient capital resources and liquidity
to manage its routine operations.

         YEAR ENDED AUGUST 31, 1996 V. 1995

         A net loss of $3,892,000, or $.44 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 $.60 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 $1,140,000,
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.




                                     -10-

<PAGE>   12

         Revenues increases $5,204,000, or 77%, to $11,961,000 in 1996 compared
to $6,757,000 in 1995.  The increase is 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 these new locations contributed approximately $2,852,000 to the
current year increase.  Effective April 1, 1996, the Company acquired Panther
Oil Tools, (UK) Ltd. (an English corporation), and the assets of Villain Ltd.
(a Guernsey Corporation).  These acquisitions resulted in an additional
$1,104,000 in 1996 revenues.

         Cost of sales and service 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 expects 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 Notes 18 and 19.

         Interest expense, net 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.

         YEAR ENDED AUGUST 31, 1995 V. 1994

         Revenues decreased $878,164 in 1995 when compared to 1994.  The
reduction is attributable to the overall lack of domestic marketing efforts.
In August 1995, the Company mounted a domestic sales effort by placing sales
personnel in major marketing areas of the Company.  Early results of this
effort appear favorable and management believes the early results of the sales
effort foretell increased sales and revenues.  The Company has added coverage
in a market area through an acquisition in Oklahoma and opening of two Company
stores.  The Company feels these additions along with increased marketing
efforts will result




                                     -11-

<PAGE>   13

in increased revenues for 1996.  A change in the accounting procedure for
inventory to better reflect cost of sales on parts resulted in a one-time gain
of $1,139,780.  A write off of all Azerbaijan assets and a one-time charge of
$400,000 for shut-down costs resulted in a one-time loss of $3,400,000.

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 dismissed the firm now known as
Kemp & Stich, P.C. and engaged 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 dismissed by the Company from its role as principle
accountant.  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.

         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, Arthur Andersen LLP ("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 agreement,
Andersen was neither asked for, nor has it expressed any opinion on any
accounting issues concerning the Company.





                                     -12-

<PAGE>   14

                                   PART III.

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Information required under this Item will be contained in the Company's 
Proxy Statement for the 1997 Annual Meeting, which is incorporated herein by 
reference.

      See also "Executive Officers of the Registrant" under Part I, Item 1, 
herein.

ITEM 11.   EXECUTIVE COMPENSATION

      Information required under this Item will be contained in the Company's 
Proxy Statement for the 1997 Annual Meeting, which is incorporated herein by 
reference.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      Information required under this Item will be contained in the Company's 
Proxy Statement for the 1997 Annual Meeting, which is incorporated herein by 
reference.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Information required under this Item will be contained in the Company's 
Proxy Statement for the 1997 Annual Meeting, which is incorporated herein by 
reference.


                                    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, 1996 and 1995  . . . . . . . . . . . . . . . . . . . . . . . . . .   F-3

        Consolidated Statements of Operations for the years ended 
        August 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-4

        Consolidated Statements of Stockholders' Equity for the years
        ended August 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-5

        Consolidated Statements of Cash Flows for the years ended
        August 31, 1996, 1995 and 1994  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-6

        Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-8
</TABLE>





                                     -13-

<PAGE>   15

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                                             Page Number
-------      -------------------------                                             -----------
<S>          <C>                                                                  
 2.1         Agreement for Sale and Purchase of Stock of Runyon Oil Tools, Inc.
             dated April 26, 1996, among Ponder Industries, Inc., Runyon Oil
             Tools, Inc., Steven E. Runyon, Freda M. Runyon, as Custodian for 
             Stephanie Runyon under the Illinois Uniform Transfers to Minors
             Act, Freda M. Runyon, as Custodian for Amanda Runyon under the
             Illinois Uniform Transfers to Minors Act, Freda M. Runyon, as
             Custodian for Lucas Runyon under the Illinois Uniform Transfers to
             Minors Act, and Freda M. Runyon, as Custodian for Blake Runyon under
             the Illinois Uniform Transfer to Minors Act. Incorporated herein by
             reference to Exhibit 2.1 of the Company's Quarterly Report on
             Form 10-Q filed July 15, 1996.
     
 2.2         Stock Purchase Agreement dated May 17, 1996, between Ponder
             Industries, Inc. and LJH Corporation. Incorporated herein by
             reference to the Company's Quarterly Report on Form 10-Q filed
             July 15, 1996.
     
*2.3         Letter Agreement dated July 23, 1996 between Ponder Industries, Inc.
             and LJH Corporation.
     
 2.4         Stock Purchase Agreement dated May 23, 1996, among Ponder Energy 
             Services, Inc., Panther Oil Tools (UK) Ltd. and Panther Oil Tools Ltd.
             Incorporated by reference to Exhibit 2.1 of the Company's Current 
             Report on Form 8-K filed June 7, 1996.
     
 2.5         Asset Purchase Agreement dated May 23, 1996, among Ponder Energy
             Services, Inc., Villain Ltd., John Le Seeleur, Mel Maitland and
             Wayne Tynon, Incorporated by reference to Exhibit 2.2 of the Company's
             Current Report on Form 8-K filed June 7, 1996.
     
*2.6         Asset Purchase Agreement dated December 6, 1996 to be effective as
             of July 1, 1996 among Ponder Industries, Inc., Bosco Fishing and
             Rental Tools, Inc. and Brooks Owens.
     
 3           Articles of Incorporation and Bylaws of Ponder Industries, Inc.
             Incorporated herein by reference to Exhibit 3 filed with Registration
             Statement on Form S-1 (Commission File No. 33-33190).
     
 4           Instruments Defining the Rights of Security Holders. Incorporated herein
             by reference to Exhibit 4 filed with Registration Statement on Form S-1
             (Commission File No. 33-33190).
     
 4.1         Form of 8% Convertible Debenture of Ponder Industries, Inc. dated April 26,
             1996. Incorporated herein by reference to the Company's Quarterly Report
             on Form 10-Q filed July 15, 1996.
     
 10.1        1994 Incentive Stock Option Plan. Incorporated herein by reference to
             Exhibits filed with Proxy Statement for the Company's annual meeting for
             1993.
     
 10.2        1994 Directors Stock Option Plan. Incorporated herein by reference to
             Exhibits filed with Proxy Statement for the Company's annual meeting
             for 1993.
     
 10.3        Regulation S Securities Subscription Agreement dated April 26, 1996,
             among each Subscriber for 8% Convertible Debentures of Ponder Industries,
             Inc. and Ponder Industries, Inc. Incorporated herein by reference to the
             Company's Quarterly Report on Form 10-Q filed July 15, 1996.
     
 10.4        Offshore Securities Subscription Agreement dated December 22, 1995,
             between Eagle Management Services Limited and Ponder Industries, Inc.
             Incorporated herein by reference to the Company's Quarterly Report
             On Form 10-Q filed July 15, 1996.
     
*10.5        Formation and Shareholders' Agreement of Ponder - DTI, Inc. dated
             November 15, 1996 between Ponder Energy Services, Inc. and Drilling
             Tools International, Ltd.
     
*10.6        Lease Agreement dated December 1, 1996 between Ponder Energy Services,
             Inc. and Drilling Tools International, Ltd.
     
 10.7        Offshore Securities Subscription Agreement dated December 22, 1995,
             between Atlantic Holdings Limited and Ponder Industries, Inc.
             Incorporated herein by reference to the Company's Quarterly Report on
             Form 10-Q filed July 15, 1996.
     
 10.8        Warrant to Purchase Common Stock, $.01 par value, of Ponder Industries,
             Inc. between Eagle Management Services Limited and Ponder Industries,
             Inc. Incorporated herein by reference to the Company's Quarterly
             Report on Form 10-Q filed July 15, 1996.
     
 10.9        Warrant to Purchase Common Stock, $.01 par value, of Ponder Industries,
             Inc. between Atlantic Holdings Limited and Ponder Industries, Inc.
             Incorporated herein by reference to the Company's Quarterly Report on
             Form 10-Q filed July 15, 1996.
     
*11          Computation of Earnings (Loss) Per Share
             
 21          Subsidiaries

<CAPTION>
                                                              Name Under Which
             Name            State of Incorporation            Doing Business 
             ----            ----------------------           ----------------
<S>          <C>             <C>                              <C>
             
             Ponder Energy                                     Ponder Energy
             Services, Inc.       Delaware                     Services, Inc.

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

(b)  REPORTS ON FORM 8-K.  None.
--------------------------------
 *   Filed herewith
</TABLE>




                                     -14-
<PAGE>   16
                      REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

We have audited the accompanying consolidated balance sheet of Ponder
Industries, Inc. (a Delaware corporation), and subsidiaries as of August 31,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended. These 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ponder Industries,
Inc., and its subsidiaries as of August 31, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

As discussed in Note 14 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/ ARTHUR ANDERSEN LLP


San Antonio, Texas
December 2, 1996


                                      F-1

<PAGE>   17
                          INDEPENDENT AUDITORS' REPORT




Board of Directors and Stockholders
Ponder Industries, Inc.:

We have audited the accompanying consolidated balance sheet of Ponder
Industries, Inc., and subsidiaries as of August 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period 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 financial position of Ponder Industries, Inc., and its
subsidiaries at August 31, 1995, and the results of their operations and their
cash flows for each of the two years in the period 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 for the past three years, 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 14 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>   18






                   PONDER INDUSTRIES, INC., AND SUBSIDIARIES


            CONSOLIDATED BALANCE SHEETS - - AUGUST 31, 1996 AND 1995




<TABLE>
<CAPTION>
                          ASSETS                                                    1996            1995
                          ------                                                 -----------    ------------

<S>                                                                              <C>             <C>
CURRENT ASSETS:
   Cash and cash equivalents-
     Unrestricted                                                                $    397,927    $    180,445
     Restricted, debt collateral                                                         --           169,988
   Receivables, net of allowance for doubtful accounts
     of $138,491 and $81,731 in 1996 and 1995,
     respectively                                                                   3,646,960       1,277,110
   Other receivable                                                                   500,000            --
   Parts and supplies                                                               3,046,288       1,400,853
   Prepaid expenses and other                                                         514,464         341,468
                                                                                 ------------    ------------

                     Total current assets                                           8,105,639       3,369,864
                                                                                 ------------    ------------

PROPERTY AND EQUIPMENT                                                             28,170,569      14,310,745
   Less- Accumulated depreciation and amortization                                (12,644,782)    (11,548,868)
                                                                                 ------------    ------------

                                                                                   15,525,787       2,761,877
                                                                                 ------------    ------------

OTHER ASSETS                                                                        2,184,435         108,076

DEFERRED ASSETS, net                                                                  853,408            --

GOODWILL, net of accumulated amortization of $345,587 and
   $298,884 in 1996 and 1995, respectively                                          1,232,807         575,360
                                                                                 ------------    ------------

                                                                                    4,270,650       1,487,648
                                                                                 ------------    ------------

                                                                                 $ 27,902,076    $  6,815,177
                                                                                 ============    ============


             LIABILITIES AND STOCKHOLDERS' EQUITY                                   1996            1995
             ------------------------------------                               ------------    ------------

CURRENT LIABILITIES:
   Note payable                                                                  $       --      $    200,000
   Current maturities of long-term debt                                             1,393,001         356,522
   Bank overdraft                                                                     529,813            --
   Accounts and notes payable, trade                                                2,863,477         666,570
   Accrued liabilities-
     Commissions (related parties, $4,272 and $28,019 in 1996
       and 1995, respectively)                                                        123,562          83,919
     Other                                                                          1,998,997         342,836
     Estimated cost, discontinued operation                                              --           510,390
                                                                                 ------------    ------------

                 Total current liabilities                                          6,908,850       2,160,237
                                                                                 ------------    ------------

LONG-TERM DEBT, less current maturities                                             4,148,207       2,343,012
                                                                                 ------------    ------------

OTHER LONG-TERM LIABILITIES                                                           449,418            --
                                                                                 ------------    ------------

DEFERRED TAXES PAYABLE                                                                233,081            --
                                                                                 ------------    ------------

CONVERTIBLE DEBENTURES                                                              9,150,000            --
                                                                                 ------------    ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Common stock, $.01 par value; authorized 50,000,000 shares, issued
     12,131,347 and 6,667,437 shares as of August 31, 1996 and 1995,
     respectively, of which 289,873 are held in treasury as of August 31, 1996
     and 1995                                                                         121,313          66,674
   Additional paid-in capital                                                      21,880,361      13,216,573
   Cumulative foreign currency translation adjustment                                  23,596            --
   Accumulated deficit                                                            (13,775,188)     (9,883,115)
                                                                                 ------------    ------------

                                                                                    8,250,082       3,400,132
   Less-
     Note receivable for common stock                                                 (63,540)        (60,466)
     Deferred compensation                                                           (146,284)           --
     Treasury stock                                                                (1,027,738)     (1,027,738)
                                                                                 ------------    ------------

                 Total stockholders' equity                                         7,012,520       2,311,928
                                                                                 ------------    ------------

                                                                                 $ 27,902,076    $  6,815,177
                                                                                 ============    ============
</TABLE>





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


                                      F-3
<PAGE>   19

                   PONDER INDUSTRIES, INC., AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

               FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994


<TABLE>
<CAPTION>
                                                                        1996            1995            1994
                                                                    ------------    ------------    ------------
<S>                                                                 <C>             <C>             <C>
TOOL RENTALS AND SALES                                              $ 11,960,753    $  6,756,738    $  7,634,902

COSTS OF SERVICE AND SALES                                             5,319,660       3,360,918       4,094,618
                                                                    ------------    ------------    ------------

                          Gross profit                                 6,641,093       3,395,820       3,540,284
                                                                    ------------    ------------    ------------

EXPENSES:
   Operating                                                           4,940,919       2,230,078       2,459,713
   General and administrative                                          6,477,636       2,603,362       2,308,249
                                                                    ------------    ------------    ------------

                                                                      11,418,555       4,833,440       4,767,962
                                                                    ------------    ------------    ------------

                          Operating loss                              (4,777,462)     (1,437,620)     (1,227,678)

OTHER INCOME (EXPENSE):
   Interest, net                                                        (673,027)       (470,903)       (413,122)
   Gain (loss) on disposal of assets                                     (12,395)      1,319,637         (27,257)
   Other                                                                 260,157         148,354         115,823
                                                                    ------------    ------------    ------------

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                   (5,202,727)       (440,532)     (1,552,234)
                                                                                                                 

INCOME TAX EXPENSE                                                       (67,764)           --           (14,800)
                                                                    ------------    ------------    ------------

LOSS FROM CONTINUING OPERATIONS                                       (5,270,491)       (440,532)     (1,567,034)
                                                                    ------------    ------------    ------------

INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
   Operations                                                            (21,582)       (388,663)     (1,531,642)
   Disposal of assets including operations in disposal
     period                                                                 --        (3,402,248)           --
   Gain on sale of discontinued operations                             1,400,000            --              --
                                                                    ------------    ------------    ------------
                                                                       1,378,418      (3,790,911)     (1,531,642)
                                                                    ------------    ------------    ------------

LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE IN
   ACCOUNTING PRINCIPLE                                               (3,892,073)     (4,231,443)     (3,098,676)

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE                       --         1,139,780            --
                                                                    ------------    ------------    ------------
NET LOSS                                                            $ (3,892,073)   $ (3,091,663)   $ (3,098,676)
                                                                    ============    ============    ============

EARNINGS (LOSS) PER SHARE:
   Loss from continuing operations                                  $       (.60)   $       (.07)   $       (.25)
   Income (loss) from discontinued operations                                .16            (.59)           (.24)
   Cumulative effect of a change in accounting principle                    --               .18            --
                                                                    ------------    ------------    ------------

NET LOSS PER SHARE                                                  $       (.44)   $       (.48)   $       (.49)
                                                                    ============    ============    ============

WEIGHTED AVERAGE COMMON SHARES AND COMMON SHARE EQUIVALENTS
   OUTSTANDING                                                         8,748,498       6,377,564       6,377,564
                                                                    ============    ============    ============
</TABLE>


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


                                      F-4
<PAGE>   20






                   PONDER INDUSTRIES, INC., AND SUBSIDIARIES


                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

               FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994


<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, 1993                              6,667,437   $     66,674   $ 13,216,573   $       --     $ (3,692,776) 
   Interest on note receivable for common                                                                                    
       stock                                               --             --             --             --             --     
   Net loss                                                --             --             --             --       (3,098,676)  
                                                   ------------   ------------   ------------   ------------   ------------   
                                                                                                                              
BALANCE, August 31, 1994                              6,667,437         66,674     13,216,573           --       (6,791,452)  
   Interest on note receivable for common                                                                                     
     stock                                                 --             --             --             --             --     
   Net loss                                                --             --             --             --       (3,091,663)  
                                                   ------------   ------------   ------------   ------------   ------------   
BALANCE, August 31, 1995                              6,667,437         66,674     13,216,573           --       (9,883,115)  
                                                                                                                              
   Shares issued under employment agreement             459,333          4,593        182,010           --             --     
   Compensation expense                                    --             --             --             --             --     
   Shares issued in connection with acquisitions      1,551,455         15,515      3,743,105           --             --     
   Shares issued as employee bonus                       25,000            250         13,031           --             --     
   Shares sold with warrants attached                 1,500,000         15,000        897,000           --             --     
   Exercise of warrants                               1,000,000         10,000      1,490,000           --             --     
   Shares sold                                           83,333            833        249,167           --             --     
   Shares issued under option exercise                   16,500            165         37,733           --             --     
   Debentures converted into shares                     828,289          8,283      1,651,742           --             --     
   Compensation accrual for stock grant                    --             --          400,000           --             --     
   Interest on note receivable for common                                                                                     
     stock                                                 --             --             --             --             --     
   Foreign currency translation adjustment                 --             --             --           23,596           --     
   Net loss                                                --             --             --             --       (3,892,073)  
                                                   ------------   ------------   ------------   ------------   ------------   
BALANCE, August 31, 1996                             12,131,347   $    121,313   $ 21,880,361   $     23,596   $(13,775,188) 
                                                   ============   ============   ============   ============   ============  
                                                                                                                             
<CAPTION>
                                                        Note
                                                      Receivable
                                                        for
                                                       Common         Deferred        Treasury
                                                       Stock        Compensation       Stock           Total
                                                    ------------    ------------    ------------    ------------
<S>                                                 <C>              <C>             <C>             <C>
BALANCE, August 31, 1993                            $    (54,318)   $       --      $ (1,027,738)   $  8,508,415
   Interest on note receivable for common         
       stock                                              (3,074)           --              --            (3,074)
   Net loss                                                 --              --              --        (3,098,676)
                                                    ------------    ------------    ------------    ------------
                                                  
BALANCE, August 31, 1994                                 (57,392)           --        (1,027,738)      5,406,665
   Interest on note receivable for common         
     stock                                                (3,074)           --              --            (3,074)
   Net loss                                                 --              --              --        (3,091,663)
                                                    ------------    ------------    ------------    ------------
                                                  
BALANCE, August 31, 1995                                 (60,466)           --        (1,027,738)      2,311,928
                                                  
   Shares issued under employment agreement                 --          (186,603)           --              --
   Compensation expense                                     --            40,319            --            40,319
   Shares issued in connection with acquisitions            --              --              --         3,758,620
   Shares issued as employee bonus                          --              --              --            13,281
   Shares sold with warrants attached                       --              --              --           912,000
   Exercise of warrants                                     --              --              --         1,500,000
   Shares sold                                              --              --              --           250,000
   Shares issued under option exercise                      --              --              --            37,898
   Debentures converted into shares                         --              --              --         1,660,025
   Compensation accrual for stock grant                     --              --              --           400,000
   Interest on note receivable for common         
     stock                                                (3,074)           --              --            (3,074)
   Foreign currency translation adjustment                  --              --              --            23,596
   Net loss                                                 --              --              --        (3,892,073)
                                                    ------------    ------------    ------------    ------------
BALANCE, August 31, 1996                            $    (63,540)   $   (146,284)   $ (1,027,738)   $  7,012,520
                                                    ============    ============    ============    ============
</TABLE>                                          



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


                                      F-5
<PAGE>   21




                   PONDER INDUSTRIES, INC., AND SUBSIDIARIES


                     CONSOLIDATED STATEMENTS OF CASH FLOWS

               FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                      1996           1995           1994
                                                                  -----------    -----------    -----------

<S>                                                               <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                       $(3,892,073)   $(3,091,663)   $(3,098,676)
   (Income) loss from discontinued operations                      (1,378,418)     3,790,911      1,531,642
   Cumulative effect of a change in accounting principle                 --       (1,139,780)          --
                                                                  -----------    -----------    -----------

       Loss from continuing operations                             (5,270,491)      (440,532)    (1,567,034)

   Adjustments to reconcile loss to net cash used in operating
     activities-
       Depreciation and amortization                                1,402,255        958,978      1,128,084
       (Gain) loss on disposal of assets                               12,395     (1,319,637)        27,257
       Noncash compensation expense                                   453,600           --             --
       Other noncash expenses                                          45,923        109,175           --
   Net change in operating assets and liabilities-
     Receivables                                                   (1,000,327)       326,877        119,609
     Other receivable                                                (500,000)          --             --
     Parts and supplies                                              (985,160)        10,696          8,776
     Prepaid expenses and other                                      (130,822)        42,885       (255,536)
     Accounts and notes payable, trade                              2,190,906       (732,915)       (37,518)
     Accrued liabilities                                            1,542,833       (123,880)       192,781
                                                                  -----------    -----------    -----------

       Net cash used in continuing operating activities            (2,238,888)    (1,168,353)      (383,581)
                                                                  -----------    -----------    -----------

CASH FLOWS FROM DISCONTINUED OPERATIONS:
   Income (loss) from discontinued operations                       1,378,418     (3,790,911)    (1,531,642)
   Add (deduct)-
     Depreciation expense                                                --          250,416         21,459
     Asset additions                                                     --          (27,581)    (1,121,093)
     Write-down of costs                                                 --        3,002,248      1,660,940
     Accrued liabilities, estimated operating cost for disposal      (510,390)       510,390           --
     Gain on sale of discontinued operations                       (1,400,000)          --             --
                                                                  -----------    -----------    -----------

       Net cash used in discontinued operations                      (531,972)       (55,438)      (970,336)
                                                                  -----------    -----------    -----------

       Net cash used in operating activities                       (2,770,860)    (1,223,791)    (1,353,917)
                                                                  -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                             (6,238,533)      (293,571)      (195,002)
   Acquisitions, net of cash acquired                              (2,470,845)          --             --
   Other asset additions                                           (1,196,047)          --          (50,384)
   Proceeds from asset sales and notes receivable                      18,542      2,700,115        263,291
                                                                  -----------    -----------    -----------

       Net cash provided by (used in) investing activities         (9,886,883)     2,406,544         17,905
                                                                  -----------    -----------    -----------
</TABLE>



                                      F-6
<PAGE>   22




                   PONDER INDUSTRIES, INC., AND SUBSIDIARIES


                     CONSOLIDATED STATEMENTS OF CASH FLOWS

               FOR THE YEARS ENDED AUGUST 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                              1996              1995           1994
                                                                          ------------    --------------   ------------
<S>                                                                       <C>             <C>              <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
   Principal payments of long-term debt                                   $ (4,051,278)   $  (10,409,732)  $ (8,777,998)
   Financing and debt collateral payments                                     (925,012)         (224,643)          --
   Proceeds from long-term debt borrowings                                   3,671,804         9,676,824      8,954,005
   Proceeds from convertible debentures                                     10,950,000              --             --
   Bank overdraft                                                              529,813           (44,757)        44,757
   Proceeds from issuance of common stock                                    2,699,898              --             --
                                                                          ------------    --------------   ------------

       Net cash provided by (used in) financing activities                  12,875,225        (1,002,308)       220,764
                                                                          ------------    --------------   ------------

CASH AND CASH EQUIVALENTS:
   Increase (decrease)                                                         217,482           180,445     (1,115,248)
   Beginning of year                                                           180,445              --        1,115,248
                                                                          ------------    --------------   ------------

   End of year                                                            $    397,927    $      180,445   $       --
                                                                          ============    ==============   ============


SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
     Cash paid during the year for-
       Interest                                                           $    458,044    $      472,358   $    416,196
       Income taxes                                                               --                --           14,800


SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:



     Assets acquired in connection with acquisitions                      $  9,635,747    $      204,705   $       --
                                                                          ============    ==============   ============

     Liabilities assumed in connection with acquisitions                  $  1,689,995    $         --     $       --
                                                                          ============    ==============   ============

     Common stock issued in connection with acquisitions                  $  3,758,620    $         --     $       --
                                                                          ============    ==============   ============

     Debt incurred in connection with acquisitions                        $  2,177,329    $         --     $       --
                                                                          ============    ==============   ============

     Capital lease obligations incurred                                   $    293,819    $         --     $       --
                                                                          ============    ==============   ============

     Common stock issued in connection with debenture conversions
                                                                          $  1,660,025    $         --     $       --
                                                                          ============    ==============   ============

     Common stock issued to officers, directors and employees             $    346,168    $         --     $       --
                                                                          ============    ==============   ============

     Sale of discontinued Azerbaijan operations in exchange for
       2,000,000 shares of Titan stock                                    $  1,400,000    $         --     $       --
                                                                          ============    ==============   ============

     Compensation accrual for stock grant                                 $    400,000    $         --     $       --
                                                                          ============    ==============   ============
</TABLE>



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



                                      F-7

<PAGE>   23
                   PONDER INDUSTRIES, INC., AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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. As of August 31, 1996, the Company operated out of its
administrative headquarters in Alice, Texas, and "stores" located in Texas,
Oklahoma, Arkansas, Illinois, Louisiana and Mississippi. The Company also
operates in the UK through certain acquisitions during fiscal 1996 as discussed
in Note 16.

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 14.)

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.)



                                      F-8
<PAGE>   24
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.

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 at August 31, 1996. The carrying values
of the Company's cash and cash equivalents, receivables, accounts payable, debt
and all other financial instruments approximate their fair values without
consideration for the convertibility of the debentures (Notes 7 and 13).

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 are 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 the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (FAS No. 109), which requires the establishment of a deferred tax
asset or liability for the recognition of future deductible or taxable amounts
and operating loss and tax credit carryforwards. Deferred tax expense or
benefit is recognized as a result of the changes in the assets and liabilities
during the year. Management adopted FAS No. 109 for the first quarter of the
year ended August 31, 1994. The Company has chosen to treat the adoption as a
cumulative effect of a change in accounting principle. However, the accounting
change had no material effect on the financial statements. The Company has
established a valuation allowance equal to its net deferred tax asset.

Earnings (Loss) Per Share

Earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares and common share equivalents
outstanding during each year. Any warrants or options outstanding are
considered common stock equivalents provided they have a dilutive effect on
earnings (loss) per share. For the 1995 and 1994 fiscal years presented, such
items were antidilutive and have not been included in the per share
calculation.

New Accounting Pronouncements

In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" (FAS 121), was issued. Under FAS 121, an impairment loss must be
recognized for long-lived assets and certain identifiable intangibles to be
held and used by an entity whenever events or changes in circumstances indicate
that the carrying amounts of an asset may not be recoverable. FAS 121 is
effective for financial statements issued for fiscal years beginning after



                                      F-9
<PAGE>   25
December 15, 1995, and must be adopted on a prospective basis. Restatement of
previously issued financial statements is not permitted. Management of the
Company does not anticipate that the adoption of FAS 121 will have a material
effect on the financial position or results of operations of the Company.

In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), was issued. FAS 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, FAS 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 25). Entities electing to remain with the accounting prescribed by APB 25
must make pro forma disclosures of net income and earnings per share as if the
fair value based method recommended by FAS 123 had been applied. The accounting
and disclosure requirements of FAS 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995. The Company intends to
measure compensation costs in accordance with APB 25 and to provide pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting under FAS 123 had been applied. Therefore, FAS 123 will
not have a material effect on the financial position or results of operations
of the Company.

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

During the years ended August 31, 1996, 1995 and 1994, the Company incurred net
losses from continuing operations of $5,270,491, $440,532 and $1,567,034,
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 covenants of its note
payable to a bank. The note was refinanced subsequent to August 31, 1996, with
a new lender on a long-term basis. The Company has also taken steps to improve
its 1997 fiscal year operating results, which include anticipated improvements
relating to the Company's 1996 acquisitions described in Note 16. The Company's
management believes that it is likely the Company's operating results for
fiscal 1997 will significantly improve over fiscal 1996 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. If the Company is unable to significantly improve operations, the
Company will require additional capital infusions to maintain continuing
operations. There are no assurances that any additional capital infusions would
be available.

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 9 percent of the
Company's net sales for the year ended August 31, 1996, and 23 percent of its
identifiable assets at August 31, 1996, are attributable to foreign operations
as described in Note 17.

Approximately 5 percent of the Company's total assets and 20 percent of its
total stockholders' equity at August 31, 1996, relate to the Company's
investment in and other receivable 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 at August 31, 1996, 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 December 2, 1996, the last
quoted sales price for Titan was $.50 per share.




                                     F-10
<PAGE>   26
 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 for the year ended August 31, 1995.

A provision in the Company's loan agreement 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 ($3,002,248), and to provide an additional $510,390 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. The Company then sold 500,000 shares of Titan
stock to an investment company for $500,000. This amount is shown as an other
receivable on the consolidated balance sheet at August 31, 1996. The remaining
1,500,000 shares of Titan stock were valued at an estimated fair market value
of $900,000 (60 cents per share). This investment is a component of other
assets on the consolidated balance sheet at August 31, 1996. This resulted in a
gain of $1.4 million on the discontinued operations that were previously
written off. The Titan stock was valued at a discount to its trading price when
acquired in recognition of its restricted status, the thinly traded nature of
this security and related price volatility. The Titan stock is classified as an
available-for-sale security in accordance with the guidelines of Statement of
Financial Accounting Standards 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
is reported as a separate component of stockholders' equity.

 4.   PROPERTY AND EQUIPMENT

Property and equipment consists of the following:


<TABLE>
<CAPTION>
                                      August 31
                             --------------------------
                                1996            1995       Asset Life
                             -----------   ------------  --------------
<S>                            <C>           <C>         <C>
Land                         $   205,495   $   180,495
Buildings and improvements     1,847,789     1,621,749   20 years
Rental tools and equipment    21,732,740     9,956,706   5 - 10 years
Shop equipment and tools       1,893,937     1,785,579   5 years
Transportation equipment       1,693,586       349,159   3 - 5 years
Furniture and fixtures           533,755       417,057   5 years
Capital leases                   263,267          --     3 - 5 years
                             -----------   ------------

                             $28,170,569   $ 14,310,745
                             ===========   ============
</TABLE>



                                     F-11
<PAGE>   27
During May of 1995, the Company conducted an auction of its excess rental tools
and certain equipment. Such sale resulted in $2,657,656 proceeds and $1,357,887
gain from disposal of assets.

 5.   NOTES PAYABLE, ACCOUNTS PAYABLE
      AND ACCRUED LIABILITIES:

On July 27, 1995, the Company signed a revolving loan agreement with a bank.
The revolving line of credit bears interest at 2.5 percent above a defined
reference lending rate. At August 31, 1996 and 1995, the Company had $0 and
$200,000, respectively, borrowed against this line of credit that provides a
maximum borrowing limit of $500,000. Borrowings are further limited to 80
percent of certain defined accounts receivable, up to the maximum limit. The
note is secured under the same agreement as a long-term note payable to the
same lender as described in Note 6. Also, as discussed in Note 6, the Company
was not in compliance with certain of the lender's required covenants at August
31, 1996. The weighted average interest rates on short-term borrowings were 9.3
percent and 11.5 percent for the respective years ended August 31, 1996 and
1995.

Included in accounts and notes payable-trade on the accompanying balance sheets
as of August 31, 1996 and 1995, are $501,599 and $229,367 notes payable,
respectively. These notes are for insurance and are due in equal monthly
installments during the succeeding fiscal year.

Included in other accrued liabilities at August 31, 1996, are $350,000 of
accrued bonuses, $850,000 of accrued legal and professional fees, $27,000 of
accrued interest expense, $190,000 of accrued taxes and $150,000 of accrued
insurance expenses. Included in other long-term liabilities at August 31, 1996
is $254,000 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
                                               --------------------------
                                                  1996           1995
                                               -----------    -----------
<S>                                            <C>            <C>
Notes payable-
  Bank term note                               $ 2,174,254    $ 2,500,000
  Bank note to fund Apex Tool acquisition          176,362           --
  Real estate                                       71,485         74,317
  Bank note assumed in Bosco acquisition           650,000           --
  Bosco                                            550,000           --
  Capital lease obligations                        540,370        125,217
  Apex Tool                                        200,000           --
  Vehicles                                         851,866           --
  Related-party promissory note                    326,871           --
                                               -----------    -----------

                                                 5,541,208      2,699,534
  Less- Current maturities                      (1,393,001)      (356,522)
                                               -----------    -----------

Long-term debt, excluding current maturities   $ 4,148,207    $ 2,343,012
                                               ===========    ===========
</TABLE>




                                     F-12
<PAGE>   28



Maturities of long-term debt as of August 31, 1996, were as follows:

<TABLE>
<S>        <C>                               <C>
           1997                              $  1,393,001
           1998                                 1,026,628
           1999                                   952,342
           2000                                   734,589
           2001                                   847,832
           Thereafter                             586,816
                                             ------------
                                             $  5,541,208
                                             ============
</TABLE>


On July 27, 1995, the Company entered into a loan agreement with a bank that
provides both a revolving line of credit and a term facility. See Note 5 for a
description of the revolving credit line. The term note bears interest at 2.5
percent above a reference rate (8.25 percent at August 31, 1996) and is payable
in monthly installments of $54,668 commencing December of 1995. The agreement
was to remain in force for a three-year period. Both the revolving and term
notes are secured by the Company's assets, not otherwise pledged as collateral
under other debt agreements and are guaranteed by the Company's former chairman
of the board and chief executive officer, the Company's current president and
one of the Company's subsidiaries. Under the terms of this loan agreement, the
Company was required to establish a collateral reserve account of $300,000 by
December 31, 1995. Such funds are restricted and are to be used for payment of
any current obligation under this bank loan agreement. As of August 31, 1996
and 1995, $0 and approximately $170,000, respectively, of funds were deposited
in said account and included in restricted assets on the accompanying
consolidated balance sheets. Additionally, the agreement contains covenants for
compliance with reporting and prompt payment of certain items and obtaining
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. In November 1996, the Company obtained new financing from a lender
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) 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 (15.25
percent at November 30, 1996) and matures in full in November 2001. 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 (15.25 percent at November 30, 1996) and
requires monthly payments of interest only through May 1997. Beginning in June
1997, the Term Loan requires monthly principal and interest payments of $82,806
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 ending 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, of not less than $13.5 million at
all times. The tangible net worth requirement allows 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.

The bank note to fund the Apex Tool acquisition (see Note 16) bears interest at
2.5 percent above a reference rate (8.25 percent at August 31, 1996), is
secured by certain real estate in Oklahoma and is payable monthly through
August 1998.





                                     F-13
<PAGE>   29
The real estate note is to an individual, bears interest at 8.5 percent and is
payable in monthly installments of $753, 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 16) bears interest at
8.25 percent and matures in December 1996. The Bosco note represents amounts    
due certain creditors of Bosco. The Company intends to pay both of these
amounts with borrowings under the new financing obtained in November 1996 as
described above and, accordingly, both of the Bosco notes have been classified
in accordance with the terms of the new financing on the accompanying balance
sheet at August 31, 1996.

The Company leases vehicles and equipment under capital lease obligations that
have varying terms from 24 to 47 months. Minimum lease payments were
capitalized at the Company's estimated weighted average incremental borrowing
rate of approximately 11 percent.

The Apex Tool note was assumed in an acquisition (see Note 16).

The vehicle notes payable have varying terms from 12 to 48 months and bear
interest at rates ranging from 4.8 percent to 11.75 percent.

The related-party promissory note was issued by the Company in the Armstrong
acquisition (see Note 16), is noninterest bearing and has no stated maturity
date.

 7.   CONVERTIBLE DEBENTURES:

Effective April 26, 1996, the Company completed a $10,950,000 placement of
eight percent convertible debentures. The debenture issue resulted in proceeds
of $9,855,000, net of issuance costs. Issuance costs are a component of
deferred assets on the consolidated balance sheet at August 31, 1996, and are
being amortized over a three-year period. The debentures may be converted into
common stock of the Company as of specified dates. The debentures generally
convert at a defined conversion price formula, based on the lesser of $5.0625
per share or at a variable conversion rate relative to the market price at date
of conversion. If the conversion price is less than $5.0625 per share, the
Company shall have the right, in its sole discretion, to redeem any debentures
in lieu of conversion based upon the principal and interest due multiplied by
the market price, as defined, and divided by 85 percent of the market price.
The Company may also, at its election, redeem the debentures prior to April 26,
1999, at the following call prices:

<TABLE>
<CAPTION>
               Date of Redemption                                         Call Price
               ------------------                                         ----------
<C>                                                   <C>
12 months - 18 months following placement             130 percent of principal and unpaid interest
18 months - 24 months following placement             125 percent of principal and unpaid interest
24 months - 30 months following placement             120 percent of principal and unpaid interest
30 months - 36 months following placement             115 percent of principal and unpaid interest
April 26, 1999 (maturity date)                        100 percent of principal and unpaid interest
</TABLE>


At April 26, 1999, the Company may satisfy amounts due the convertible
debenture holders by converting the debentures into shares of the Company's
common stock. The new financing obtained in November 1996, as described in Note
6, effectively precludes the Company from redeeming the convertible debentures
without the lender's consent. As of August 31, 1996, debentures in the
aggregate principal amount of $1,800,000 had been converted into 828,289 shares
of common stock. As discussed in Note 13, claims and counterclaims have been
filed between certain of the convertible debenture holders and the Company. The
Company has ceased conversion of the debentures pending resolution of these
matters.



                                     F-14
<PAGE>   30



 8.   EMPLOYEE STOCK PLANS:

In June 1992, the Company filed 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
and 1994 Directors' Stock Option Plan. In August 1995, the Company filed Form
S-8 registering 500,000 shares of common stock as follows: 250,000 shares to
Incentive Stock Option Plan and 250,000 shares to Directors' Stock Option Plan.
The Incentive Plan provides that options may be granted to employees for up to
250,000 shares. Any one employee is limited to $100,000 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 value of the 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 serving on the board as of the annual
stockholders' meeting date in the years 1994 through 1998. The option price is
the fair value of the stock at the time of the grant. 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' Stock Option Plan is set forth
below:

<TABLE>
<CAPTION>
                                             Total
                                            Shares                 Exercise
                                           Reserved     Activity     Price
                                           --------     --------     -----
<S>                                         <C>          <C>       <C>
Balances, August 31, 1993                   250,000        --
   Granted                                  (38,500)     38,500    $ 2.1875
   Canceled                                   5,500      (5,500)   $ 2.1875
                                           --------    --------

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
                                           ========    ========

Issued and exercisable, August 31, 1996-
   1994 grants                                           27,500    $ 2.1875
   1995 grants                                           38,500    $ 1.0156
   1996 grants                                           44,000    $ 3.6875
                                                       --------
                                                        110,000
                                                       ========
</TABLE>


There has been no activity with respect to the other option plans.

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, continued personal guarantees of Company
indebtedness and his return to the Company of the warrants referred to above as
well as his return of options to purchase up to 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. As discussed in Note 19, the 500,000 shares of
restricted stock were issued in September of 1996.



                                     F-15
<PAGE>   31



 9.   INCOME TAXES:

Effective September 1, 1993, the Company changed its method of accounting for
income taxes to conform to the requirements of FAS 109. Under the provision of
FAS 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>
                                            1996           1995
                                         -----------    -----------
<S>                                      <C>            <C>
Deferred tax assets-
   Net operating loss carryforwards      $ 4,315,000    $ 3,700,000
   Tax credit carryforwards                  624,000        624,000
   Property and equipment                    145,000        174,000
   Allowance for receivables                  75,000         28,000
   Liabilities                               464,000           --
                                         -----------    -----------

             Gross deferred tax assets     5,623,000      4,526,000

Deferred tax liabilities-
   Property and equipment (foreign)         (233,081)          --
                                         -----------    -----------
                                           5,389,919      4,526,000
Total valuation allowance                 (5,623,000)    (4,526,000)
                                         -----------    -----------

Net deferred tax liabilities             $  (233,081)   $      --
                                         ===========    ===========
</TABLE>

Income tax expense (all foreign) for the fiscal year ended August 31, 1996, was
$67,764 and relates to taxes on the Company's UK operations related to 1996
acquisitions as discussed in Note 16. The remaining increase in deferred taxes
payable is the result of book and tax basis differentials existing at the date
of the UK acquisitions. Income tax expense (all foreign) for the fiscal year
ended August 31, 1994, was $14,800. The foreign taxes relate to taxes assessed
on approximately $72,000 in the year ended August 31, 1994, of domestic exports
to Petroleos Mexicanos of Mexico. The Company did not have any operations in
Mexico during the 1996 and 1995 fiscal years.

At August 31, 1996, the Company had net operating loss (NOL) carryforwards of
approximately $12,689,000 for income tax purposes. Such losses will expire in
the years ending August 31, 2007 ($2,404,000), 2008 ($1,796,000), 2009
($3,668,000), 2010 ($2,704,000) and 2011 ($2,117,000). The Company has
approximately $347,000 of unused foreign income tax credits for federal income
tax which expire in 1997 ($38,000), 1998 ($72,000), 1999 ($141,000) and 2000
($96,000). Also, the Company has unused investment tax credit carryforwards of
approximately $277,000 to reduce future income taxes payable which expire in
1997 ($150,000), 1998 ($30,000), 1999 ($52,000), 2000 ($41,000) and 2001
($4,000). The Company must first use its available NOL carryforwards to offset
future taxable income before utilizing its available tax credits.

The Company's ability to use its NOL and tax credit carryforwards to offset
future taxable income is subject to the restrictions of Section 382 of the
Internal Revenue Code (Code). Section 382 restricts the utilization of the NOL
and tax credit carryforwards when the beneficial stock ownership of a
corporation changes by more than 50 percentage points within a three-year
period (an Ownership Change). As of August 31, 1996, the Company had incurred
at least a 45 percent Ownership Change during the applicable three-year period.
If an Ownership Change had occurred as of August 31, 1996, the Section 382
annual limitation would have been approximately $1,550,000.



                                     F-16
<PAGE>   32



10.   RELATED-PARTY TRANSACTIONS:

Certain stockholders of the Company are also independent fishing tool operators
who provide services to the Company on a commission basis. The Company incurred
$1,175,609, $1,482,545 and $1,867,420 of commission expense in 1996, 1995 and
1994, respectively, of which $38,437, $593,855 and $723,439, respectively, were
related to these individuals. Management of the Company believes these services
were performed on an arm's-length basis. Included in this amount are accrued
commissions of $4,272, $28,019 and $67,478 at August 31, 1996, 1995 and 1994,
respectively. In fiscal 1997, management of the Company intends to conduct
substantially all of its fishing tool operations with salaried operators.

The Company has a note receivable from an employee totaling $63,540 and $60,466
at August 31, 1996 and 1995, 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, 1997. 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 are as follows:

<TABLE>
<C>                                              <C>
1997                                             $  187,208
1998                                                173,458
1999                                                149,622
2000                                                 25,462
2001                                                  1,190
                                                 ----------
Total minimum lease payments                     $  536,940
                                                 ==========
</TABLE>

Total rent expense for all operating leases amounted to $81,033, $61,950 and
$86,200 for the years ended August 31, 1996, 1995 and 1994, 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 $105,000 relating to
prior years' accruals was reversed into income during 1996. No amounts have
been accrued as of August 31, 1996.

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. The Company has requested that the Commission not follow
the recommendations of the staff on the grounds that its



                                     F-17
<PAGE>   33



accounting treatment with respect to the Azerbaijan operations was appropriate
under the then existing circumstances and that the revenue was recognized in
good faith. Recently, the staff indicated it would not recommend action
concerning the Exchange Act filings but did intend to recommend that the
Commission take action with respect to the press release. That recommendation
is currently pending and at this time there has been no indication as to what
action the Commission will take.

The Company is a defendant in a lawsuit by a former employee seeking damages
for a wrongful termination. The suit was filed in December 1993. The suit seeks
approximately $317,000 in unpaid wages and value of $142,695 for 38,052 shares
of stock he would have earned during the remainder of his contract term. In May
of 1995, the former employee sought to enjoin the Company from conducting an
auction sale of certain assets; as a result of those injunctive proceedings,
the Court ordered that $200,000 of the proceeds from the auction be tendered
into the registry of the Court to satisfy any possible adverse judgment against
the Company. The Company asserts that the former employee was properly
terminated under the terms of his contract and is vigorously contesting the
claim and believes that it has meritorious defenses regarding this matter.

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. The plaintiff asserts damages in an amount in excess of $50,000,
attorney's fees and costs and seeks an order compelling the Company to convert
the plaintiff's debentures into common stock. The Company is contesting the
plaintiff's claims and has responded to the plaintiff's complaint by filing
counterclaims and third-party claims against the plaintiff, the Company's other
convertible debenture holders and the placement agent on the convertible
debenture offering alleging various violations of the Securities Exchange Act,
common law fraud, civil conspiracy, negligent misrepresentation, breach of
contract, breach of fiduciary duty, negligence, indemnification and seeking a
declaration that the Company has no obligation to convert the debentures and no
liability for failure to so convert. Also, in August 1996, an action was filed
in the United States District Court for the Northern District of Illinois,
Eastern Division, by two other convertible debenture holders of the Company who
allege that the Company breached an obligation to convert certain debentures
held by the plaintiffs into the Company's common stock. The plaintiffs seek a
declaratory judgment setting forth the rights and liabilities of the parties
and an award of shares of common stock or an undisclosed amount of money
allegedly due them. The Company is contesting plaintiffs' claims and has
removed the action to federal court and has moved to transfer it to the Western
District of New York pursuant to a forum selection clause in the agreements
between the parties. The plaintiffs have recently agreed to the transfer of the
action to the Western District of New York.

The Company is also a party to additional claims and legal proceedings arising
in the ordinary course of business. Although no assurances can be given, the
Company believes it has meritorious defenses to all of the above actions and
intends to defend itself vigorously. 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 has accrued $500,000 at August 31, 1996,
as its estimate of costs it expects to incur in defense of the above actions.

14.   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



                                     F-18
<PAGE>   34
customer. As of August 31, 1995, the physical quantity of these items were
valued at cost, determined by a method approximating average cost 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 $1,139,780. 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.

15.   EMPLOYMENT AGREEMENTS:

Effective September 1, 1995, the Company entered into an employment agreement
with the Company's new president and chief operating officer. Since July 1995,
he had served the Company in such capacity without a contractual agreement. The
agreement provides for an annual salary of $100,000 payable in monthly
increments for four years. In addition, he received 459,333 shares of Rule 144
stock of Ponder 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 is being amortized to expense over a four-year
period. He is to also receive stock options based on the Company's meeting
defined cash flow and stock price performance levels in each of the years. The
Company's attainment of these performance levels will result in the options
being granted to him to purchase $100,000 of stock at the listed price at the
beginning of each fiscal year. The options are to remain in effect for a period
of three years subsequent to award date.

In connection with certain of the acquisitions described in Note 16, the
Company entered into various employment agreements which provide for combined
future compensation of approximately $228,000, $164,000 and $54,000 in fiscal
years 1997, 1998 and 1999, respectively.

16.   ACQUISITIONS:

The following describes acquisitions by the Company during the year ended
August 31, 1996.

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 president and his wife. Consideration given for
Armstrong was the issuance of a $400,000 promissory note to the Company's
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, and is in the business of buying
and reselling oilfield rental tools and equipment.

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

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



                                     F-19
<PAGE>   35
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 $283,425 and 331,455 shares
of the Company's restricted common stock which were valued at approximately
$640,000.

Effective June 1996, the Company acquired substantially all of the assets of
Reeled Tubular Components, Inc. (RTC) (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.

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 $200,000, an additional $550,000 to
be paid to certain creditors of Bosco and assumption of a $650,000 note payable
bearing interest at 8.25 percent and maturing December 1996.

In August 1996, the Company acquired all of the issued ordinary shares of Prime
Pipe Limited (a UK company) for approximately $105,000 and an obligation to
issue 4,650 shares of Ponder Industries, Inc., common stock.

The results of operations of all acquisitions after the respective acquisition
dates are included in the 1996 consolidated statement 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 periods presented. The remaining acquisitions were not
considered to have a significant effect on the unaudited pro forma information.
The cash portion of the Panther and Villain purchase price and acquisition
related costs were funded by a portion of the net proceeds from the placement
of convertible debentures as discussed in Note 7. The unaudited pro forma
information includes adjustments to reflect the effect on depreciation expense
of recording the fair value of property and equipment acquired and the pro rata
portion of interest expense on the convertible debentures and debt assumed
related to the acquisitions:

<TABLE>
<CAPTION>
                                                Years Ended August 31
                                            -----------------------------
                                                1996            1995
                                             ------------    ------------
                                                      (Unaudited)
<S>                                         <C>             <C>
Sales                                       $ 14,709,747    $ 10,646,778
Cost of sales                                 (6,344,132)     (4,927,620)
                                            ------------    ------------

Gross profit                                $  8,365,615    $  5,719,158
                                            ============    ============

Loss from continuing operations             $ (5,017,786)   $   (692,164)
                                            ============    ============

Loss per share from continuing operations   $       (.52)   $       (.09)
                                            ============    ============
</TABLE>


The unaudited pro forma information is based upon available information and
certain estimates and assumptions related to the accounting for the Panther,
Villain, Bosco and Armstrong acquisitions that is subject to final
determination. 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 periods 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) for consideration of $4,000,000 and
issuance of a $5,000,000 short-term note. In July 1996, the Company entered
into an agreement with G&L which gives the Company a one-year option to acquire



                                     F-20
<PAGE>   36
G&L under the same terms as the letter of intent. In connection with this
agreement, the Company issued to G&L a $1 million forfeitable deposit. At
August 31, 1996, approximately $1,156,000 was in other assets on the
consolidated balance sheet related to this pending acquisition, including the
forfeitable deposit. Management of the Company anticipates that this
acquisition will be completed by June 1997.

17.   GEOGRAPHIC INFORMATION:

Information by geographic location for 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,
                                                             1996
                                                        --------------
<S>                                                    <C>
Net sales-
   Domestic                                              $  10,857,215
   Foreign                                                   1,103,538
                                                        --------------

                        Total                            $  11,960,753
                                                         =============
Loss from continuing operations-
   Domestic                                              $  (5,122,718)
   Foreign                                                    (147,773)
                                                        --------------

                        Total                            $  (5,270,491)
                                                         =============
Identifiable assets-
   Domestic                                              $  21,552,446
   Foreign                                                   6,349,630
                                                        --------------

                        Total                              $27,902,076
                                                         =============
</TABLE>


The Company's foreign operations relate to Panther and Villain as discussed in
Note 16.

18.   QUARTERLY RESULTS OF
      OPERATIONS (UNAUDITED):

The results of operations by quarter for the fiscal years ended August 31, 1996
and 1995, 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>
1996 - quarter ended-
   November 30                            $  2,145,851  $  1,298,886     $     12,315         $    -
   February 29                               2,036,006       950,054         (723,032)          (.08)
   May 31                                    3,002,564     1,815,355         (634,565)          (.07)
   August 31                                 4,776,332     2,576,798       (3,925,209)          (.34)
                                          ------------  ------------     ------------

                 Total                    $ 11,960,753  $  6,641,093     $ (5,270,491)
                                          ============  ============     ============
1995 - quarter ended-
   November 30                            $  2,027,198  $  1,045,150     $    (15,751)        $    -
   February 28                               1,817,811       911,561         (113,185)          (.01)
   May 31                                    1,331,963       616,945          904,899            .14
   August 31                                 1,579,766       822,164       (1,216,495)          (.19)
                                          ------------  ------------     ------------

                 Total                    $  6,756,738  $  3,395,820     $   (440,532)
                                          ============  ============     ============
</TABLE>


                                     F-21
<PAGE>   37



During the fourth quarter of 1996, the Company accrued $500,000 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
$400,000 in compensation expense related to a stock grant to a former officer
and director of the Company as discussed in Note 19. Additional compensation
expense of $350,000 related to employee bonuses and approximately $300,000
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.
During the second quarter of 1996, the Company recognized a gain of $1.4
million on the sale of its former operations in Azerbaijan as discussed in Note
3. During the third quarter of 1995, the Company recognized a gain of
$1,357,887 from the disposal of assets as discussed in Note 4. As discussed in
Note 3, $3,512,638 was recognized in the fourth quarter of 1995 related to the
discontinuance of operations in Azerbaijan. Additionally, in the fourth quarter
of 1995, the Company recognized income of $1,139,780 related to the cumulative
effect of a change in accounting principle as discussed in Note 14.

19.   SUBSEQUENT EVENTS:

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

In November 1996, the Company entered into a joint venture formation agreement
with Drilling Tools International, Ltd., a Gibraltar corporation (DTI),
pursuant to which DTI will contribute all of its assets and liabilities and the
Company will make an equivalent contribution of assets. The joint venture is to
be based in Dubai, United Arab Emirates, and be formed under the laws and
regulations of the Jebel Ali Free Zone Authority. Until such time as the joint
venture is formed, the Company intends to lease its assets to DTI.

In November 1996, the Company obtained new financing from a lender as described
in Note 6.



                                     F-22
<PAGE>   38
                                   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 December 11, 1996.

                                        PONDER INDUSTRIES, INC.

                                        By /s/   LARRY D. ARMSTRONG 
                                          -------------------------------------
                                          Larry D. Armstrong, President, Chief
                                          Executive Officer And Chairman of the
                                          Board of Directors

                                        By /s/   EUGENE L. BUTLER          
                                          -------------------------------------
                                          Eugene L. Butler, Executive Vice
                                          President, Chief Financial Officer and
                                          Director


         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 December 11, 1996.

             Signature                                   Title
             ---------                                   -----

                                         President, Chief Executive Officer and
 /s/  LARRY D. ARMSTRONG                 Chairman of the Board of Directors
------------------------------------   
LARRY D. ARMSTRONG                            
                                              
                                         Executive Vice President, Chief 
  /s/  EUGENE L. BUTLER                  Financial Officer and Director  
------------------------------------     
EUGENE L. BUTLER                         
                                         
                                         Executive Vice President of Operations
 /s/  FRANK J. WALL                      and Director
------------------------------------     
FRANK J. WALL                            
                                         

 /s/  JOE R. NEMEC                       Director
------------------------------------     
JOE R. NEMEC                             
                                         
                                         
 /s/  JOHN ROANE                         Director
------------------------------------     
JOHN ROANE                               




                                     -15-

<PAGE>   39

 /s/  RITTIE W. MILLIMAN, SR.            Director               
------------------------------------     
RITTIE W. MILLIMAN, SR.                  


/s/  JOHN LE SEELLEUR                    Director               
------------------------------------     
JOHN LE SEELLEUR                         


 /s/  BILL M. VAN METER                  Director               
------------------------------------     
BILL M. VAN METER                        




                                     -16-

<PAGE>   40
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number       Identification of Exhibit                                             Page Number
-------      -------------------------                                             -----------
<S>          <C>                                                                  
 2.1         Agreement for Sale and Purchase of Stock of Runyon Oil Tools, Inc.
             dated April 26, 1996, among Ponder Industries, Inc., Runyon Oil
             Tools, Inc., Steven E. Runyon, Freda M. Runyon, as Custodian for 
             Stephanie Runyon under the Illinois Uniform Transfers to Minors
             Act, Freda M. Runyon, as Custodian for Amanda Runyon under the
             Illinois Uniform Transfers to Minors Act, Freda M. Runyon, as
             Custodian for Lucas Runyon under the Illinois Uniform Transfers to
             Minors Act, and Freda M. Runyon, as Custodian for Blake Runyon under
             the Illinois Uniform Transfer to Minors Act. Incorporated herein by
             reference to Exhibit 2.1 of the Company's Quarterly Report on
             Form 10-Q filed July 15, 1996.
     
 2.2         Stock Purchase Agreement dated May 17, 1996, between Ponder
             Industries, Inc. and LJH Corporation. Incorporated herein by
             reference to the Company's Quarterly Report on Form 10-Q filed
             July 15, 1996.
     
*2.3         Letter Agreement dated July 23, 1996 between Ponder Industries, Inc.
             and LJH Corporation.
     
 2.4         Stock Purchase Agreement dated May 23, 1996, among Ponder Energy 
             Services, Inc., Panther Oil Tools (UK) Ltd. and Panther Oil Tools Ltd.
             Incorporated by reference to Exhibit 2.1 of the Company's Current 
             Report on Form 8-K filed June 7, 1996.
     
 2.5         Asset Purchase Agreement dated May 23, 1996, among Ponder Energy
             Services, Inc., Villain Ltd., John Le Seeleur, Mel Maitland and
             Wayne Tynon, Incorporated by reference to Exhibit 2.2 of the Company's
             Current Report on Form 8-K filed June 7, 1996.
     
*2.6         Asset Purchase Agreement dated December 6, 1996 to be effective as
             of July 1, 1996 among Ponder Industries, Inc., Bosco Fishing and
             Rental Tools, Inc. and Brooks Owens.
     
 3           Articles of Incorporation and Bylaws of Ponder Industries, Inc.
             Incorporated herein by reference to Exhibit 3 filed with Registration
             Statement on Form S-1 (Commission File No. 33-33190).
     
 4           Instruments Defining the Rights of Security Holders. Incorporated herein
             by reference to Exhibit 4 filed with Registration Statement on Form S-1
             (Commission File No. 33-33190).
     
 4.1         Form of 8% Convertible Debenture of Ponder Industries, Inc. dated April 26,
             1996. Incorporated herein by reference to the Company's Quarterly Report
             on Form 10-Q filed July 15, 1996.
     
 10.1        1994 Incentive Stock Option Plan. Incorporated herein by reference to
             Exhibits filed with Proxy Statement for the Company's annual meeting for
             1993.
     
 10.2        1994 Directors Stock Option Plan. Incorporated herein by reference to
             Exhibits filed with Proxy Statement for the Company's annual meeting
             for 1993.
     
 10.3        Regulation S Securities Subscription Agreement dated April 26, 1996,
             among each Subscriber for 8% Convertible Debentures of Ponder Industries,
             Inc. and Ponder Industries, Inc. Incorporated herein by reference to the
             Company's Quarterly Report on Form 10-Q filed July 15, 1996.
     
 10.4        Offshore Securities Subscription Agreement dated December 22, 1995,
             between Eagle Management Services Limited and Ponder Industries, Inc.
             Incorporated herein by reference to the Company's Quarterly Report
             On Form 10-Q filed July 15, 1996.
     
 10.5        Formation and Shareholders' Agreement of Ponder - DTI, Inc. dated
             November 15, 1996 between Ponder Energy Services, Inc. and Drilling
             Tools International, Ltd.
     
 10.6        Lease Agreement dated December 1, 1996 between Ponder Energy Services,
             Inc. and Drilling Tools International, Ltd.
     
 10.7        Offshore Securities Subscription Agreement dated December 22, 1995,
             between Atlantic Holdings Limited and Ponder Industries, Inc.
             Incorporated herein by reference to the Company's Quarterly Report on
             Form 10-Q filed July 15, 1996.
     
 10.8        Warrant to Purchase Common Stock, $.01 par value, of Ponder Industries,
             Inc. between Eagle Management Services Limited and Ponder Industries,
             Inc. Incorporated herein by reference to the Company's Quarterly
             Report on Form 10-Q filed July 15, 1996.
     
 10.9        Warrant to Purchase Common Stock, $.01 par value, of Ponder Industries,
             Inc. between Atlantic Holdings Limited and Ponder Industries, Inc.
             Incorporated herein by reference to the Company's Quarterly Report on
             Form 10-Q filed July 15, 1996.
     
 11          Computation of Earnings (Loss) Per Share
             
*21          Subsidiaries

<CAPTION>
                                                              Name Under Which
             Name            State of Incorporation            Doing Business 
             ----            ----------------------           ----------------
<S>          <C>             <C>                              <C>
             
             Ponder Energy                                     Ponder Energy
             Services, Inc.       Delaware                     Services, Inc.

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

--------------------------------
 *   Filed herewith
</TABLE>




                                     -17-