Document:

Unassociated Document

    Exhibit
      10.46

     

    ALLIS-CHALMERS
      ENERGY, #11043354

    Allis-Chalmers
      Energy Third Quarter Earnings Conference Call

    October
      8, 2005, 10:30 a.m. ET

    Moderator:
      Lisa Elliott

    

    
      	Operator:	
              Good
                afternoon, ladies and gentlemen, and welcome to the Allis-Chalmers
                Energy
                Third Quarter Earnings conference call. At this time, all participants
                are
                in a listen-only mode. Following today’s presentation, instructions will
                be given for the question and answer session. If anyone needs assistance
                at any time during the conference, please press the star followed
                by the
                zero. As a reminder, this conference is being recorded, Tuesday,
                November
                8, 2005. 

            

    

    

    I
      would
      now like to turn the conference over to Ms. Lisa Elliott, Senior Vice President
      with DRG&E. Please go ahead, ma’am.

    

    
      	Lisa
              Elliott:	
              Thank
                you, Jeff. And good morning, everyone. We appreciate you joining
                us for
                the Allis-Chalmers Energy conference call to review the company’s third
                quarter results. Before I turn the call over to management, I had
                a few
                items to go over. 

            

    

    

    If
      you
      would like to be on the company’s e-mail distribution list to receive future
      news releases or experienced a technical problem this morning and didn’t receive
      yours, please call DRG&E and relay that information to our office. That
      number is 713-529-6600. 

    

    If
      you
      would like to listen to a replay to today’s call, it will be available in a few
      hours via recorded replay until November 15, 2005. To use the replay feature,
      please call 303-590-3000, and use the pass code 11043354. You can also hear
      a
      replay of the webcast on the company’s website at www.alchenergy.com.
      Information recorded on this call speaks only as of today, November 8, 2005,
      and, therefore, time sensitive information may no longer be accurate as of
      the
      date of any replay.

    

    On
      this
      conference call today, management’s going to discuss certain topics that will
      contain forward-looking statements within the meaning of Section 27A of the
      Securities Act of 1933, and Section 21E of the Securities Act of 1934 regarding
      Allis-Chalmers
      Energy's business, financial conditions, results of operations and prospects.
      Words such as expects, anticipates, intends, plans, believes, seeks, estimates
      and similar expressions or variations of such words are intended to identify
      forward-looking statements, but are not the exclusive means of identifying
      forward-looking statements on this conference call. 

    

    Although
      forward-looking statements on this call reflect a good faith judgment of
      management, such statements can only be based on facts and factors currently
      known to management. Consequently, forward-looking statements are inherently
      subject to risks and uncertainties, and actual results and outcomes may differ
      materially from results and outlooks discussed in the forward-looking
      statements. Factors that could cause or contribute to such differences in
      results and outcomes include, but are not limited to, demand for oil and natural
      gas drilling services in the areas and markets in which the company operates,
      competition, obsolescence of products and services, the company's ability to
      obtain financing to support its operations, environmental and other casualty
      risks, and impacts of government regulation. Further information about the
      risks
      and uncertainties that may impact the company are set forth in the company's
      recent filings on Form 10-K (including without limitation the "Risk Factors"
      Section) and Form 10-Q, and in the company's other SEC filings and publicly
      available documents. Listeners are urged not to place undue reliance on these
      forward-looking statements, which speak only as of today. The company undertakes
      no obligations to revise or update any forward-looking statements in order
      to
      reflect any effects or circumstances that may arise after the date of this
      conference call.

    

    
      
         

      

      
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          1

        
          

        

      

      
         

      

    

    Please
      also note that you can find reconciliations and non-GAAP financial measures
      that
      will be discussed on today’s conference call in the Form 8-K filed by the
      company earlier today, as well as in the Press Release. 

    

    With
      that
      said, I’d like to turn the call over to the Chairman and CEO of Allis-Chalmers,
      Micki Hidayatallah. 

    

    
      	Micki
              Hidayatallah:	
              Good
                morning. I want to begin by thanking you all for finding the time
                to
                listen to our conference call. With me this morning is Dave Wilde,
                our
                President and Chief Operating Officer, and Vic Perez, our Chief Financial
                Officer. I am going to discuss today the company’s E-Third Quarter
                achievements, and then I’m going to turn the call over to Vic Perez, who
                will present a thorough review of our financial results. Dave Wilde,
                Vic
                Perez and myself will then be available for any questions in our
                question
                and answer section.

            

    

    

    During
      this quarter, among our achievements were: one, we completed a second reoffering
      for primary and secondary shares of approximately $55 million; secondly, we
      expanded and refinanced our bank credit facility; third, we acquired the
      remaining 45% equity interest in Air Comp that was previously held by MI Fluids;
      we also purchased the air drilling equipment and under-balanced drilling
      equipment from WT Enterprises; five, we expanded our casing and tubing
      operations by purchasing approximately $15 million in value of used equipment;
      and sixth, and most importantly, our dedicated management team managed our
      operations successfully through the impact of the hurricanes in Louisiana,
      Texas
      and Mexico.

    

    Let
      me
      add to these achievements and begin by talking about how we strengthened our
      capital structure and our balance sheet. In August, we completed a registered
      offering of approximately $40 million of secondary shares and $15 million of
      primary shares. Morgan Keegan acted as our underwriter. This resulted in the
      lowering of our cost of capital because we met many discounting factors. Number
      one, energy spectrum sold its shares in the offering and then the overhang
      on
      the stock was removed. Secondly, we increased our float. Third, our liquidity
      went from about 20,000 shares a day to 200,000 shares a day traded. Fourth,
      we
      enlarged our institutional holding of the stock. And five, we hope that this
      leads to further coverage of our company and our stock. All this, we believe,
      helped increase the value of the stock and lowered our cost of capital when
      we
      used equity for acquisitions. 

    

    
      
         

      

      
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    At
      the
      beginning of the third quarter, we also expanded and refinanced our bank credit
      facility by getting a $55 million financing facility from the Royal Bank of
      Canada. This consisted of a $13 million revolving line of credit, of which
      we
      are currently using $3.7 million and have an availability of $9.3 million.
      We
      also got a $42 million term loan, $24 million to refinance existing debt, and
      $18 million for acquisitions that was used to buy the 45% interest in Air Comp
      and to buy the under-balanced drilling assets from WT Enterprises.

    

    In
      early
      September, we used the proceeds of the equity offering to acquire $15 million
      worth of used equipment and expand our casing and tubing operations. Included
      in
      this purchase of equipment were hammers, tongs, lay down machines and casing
      and
      handling equipment. But the most important aspect was that the greater capacity
      allowed us to enter into the higher margin offshore markets in Texas and in
      Louisiana, as well as increased our capacity in Texas and Mexico. The full
      benefits of this equipment acquisition has not yet been felt because immediately
      after we acquired these assets, we obviously suffered the effects of the
      hurricane, Katrina, and then later in the month, Rita. And as you all are aware,
      the effects in our Louisiana operations were fairly large.

    

    In
      mid
      July, we completed the acquisition of WT Enterprises, its assets, customer
      lists
      and operations. This company was operating in the under-balanced drilling
      segment. We also acquired, as I stated earlier, the remaining 45% equity
      interest in Air Comp, LLC that gave us complete control in our ability to
      execute our strategy in our under-balanced drilling operations. We, today,
      are
      the second largest provider of compressed air and under-balanced drilling
      services. We provide under-balanced drilling, including hammer and bit services
      and compressed air services to all the drilling, geothermal, completion and
      work-over markets. We have operating locations in San Angelo and Fort Stockton,
      Texas, Farmington, New Mexico, and Grand Junction, Colorado. 

    

    As
      we
      strengthen our balance sheet, raise additional capital and complete acquisitions
      and asset purchases, at the same time, our operations have recorded record
      third
      quarter results. Revenues up 143% and net income climbed 150%. Achievements
      in
      themselves, but when you consider this in spite of the devastating effect of
      the
      hurricanes, we are extremely gratified with the results. The results reaffirm
      that our multi-prong strategy is successful for profitable growth. Our strategy
      remains the same. Number one, we enter a market by acquiring assets or
      businesses at accretive multiples. Two, we integrate the assets and operations
      into the Allis-Chalmers’ energy strategic plan. Three, we continue to invest in
      the quality of our skilled operators and in highly technical equipment. Four,
      we
      gain market share by expanding the range of services that we offer, and we
      continue to grow our customer base. Five, we continue to grow the company’s
      geographic footprint, both in the United States and look for opportunities
      internationally.

    

    
      
         

      

      
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          3

        
          

        

      

      
         

      

    

    During
      the third quarter, we successfully executed against all of these objectives
      and
      grew all five of our business segments. Take directional drilling. This business
      segments provides directional, horizontal and measurement-while-drilling
      services to oil and gas companies operating in Texas, Louisiana, Oklahoma and
      Colorado. We provide these services to our customers, both onshore and offshore.
      During the third quarter, directional drilling revenue increased 70.5% compared
      to the third quarter last year, and income from operations climbed 61.8%. This
      increase is attributable to the addition of two new operating locations in
      West
      Texas and one in Oklahoma, and increase in our operating and sales personnel,
      and expansion of our customer base and motor capacity.

    

    Our
      experienced operating management has done a tremendous job in attracting
      talented directional drillers. Three years ago, we started with ten. Today,
      we
      have in excess of 75. And to support them, we have a dedicated team of well
      planners, sales people and support staff. It is because of our investment in
      this talent and the deep commitment and dedication of our personnel that we
      are
      able to continue to successfully grow this segment. It’s due to this investment
      in our team looking to the future and the further maturity of our curve that
      our
      operating margins did dip slightly this quarter versus last year. But we
      continue to believe that as our new operations move up the curve, our operating
      margins will improve. 

    

    Moving
      on
      to our casing and tubing segments, where we supply specialized equipment,
      trained operators to install casing and tubing, change our drill pipe, and
      retrieve production tubing for both the onshore and offshore drilling and
      work-over markets, we continue to experience strong year over year revenue
      growth in the third quarter. Revenue rose 80.3%. Our domestic operations
      performed strongly, growing from $1.4 million to $3.8 million as a result of
      new
      operating facilities in Alice, Texas, Kilgore, Corpus Christi, Broussard and
      Homer, Louisiana. Facilities in Kilgore, Corpus Christi, Broussard and Homer
      just worked for a month after the hurricane. 

    

    Our
      Mexico operations experienced a slight downturn in revenue due - - from $1.4
      million last year to $1.3 million this year. This was due mainly to the impacts
      in the offshore Mexico market of, I think, the third hurricane in October was
      called - - in September - - well, anyway, Stan, Katrina and Rita. The revenue
      mix change where Mexico revenues declined did affect our margin, and they went
      down from 33% to 26%. As we move forward, we’ll continue to expand our
      geographic footprint and take our casing and tubing services to Oklahoma and
      increase our presence in East Texas. We also believe that our operations in
      Mexico will quickly rebound after the hurricane, and we will feel the benefits
      of this in the first quarter. And we continue to invest in Mexico and remain
      dedicated to this business by increasing our equipment capacity.

    

    
      
         

      

      
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          4

        
          

        

      

      
         

      

    

    I’m
      now
      going to discuss the compressed air drilling segment. Where revenues rose a
      staggering 221% and our income increased by 1,250% in the third quarter of
      2005,
      versus the comparable period in the previous year. This performance, we believe,
      was outstanding and was the result of the effective and successful integration
      of our strategic acquisitions, including the purchase of air drilling and
      under-balanced drilling assets from WT Enterprises in July. This was quickly
      integrated into our system and also benefited from our previous acquisition
      of
      Diamond Air and Marquis Bits in November, 2004. As we move forward, we’ll
      continue to grow these assets and benefit from our ability to control 100%
      of
      Air Comp, LLC. 

    

    We
      also,
      at the end of last year, ventured into the production services segment, and
      we’re now reporting these services as a separate business section with the
      acquisition of Capcoil. In the production service segment, we supply specialized
      equipment, trained operators that install capillary and coil tubing units that
      inject chemicals to enhance the production of oil and gas wells. This segment
      of
      our business started in December, but we made the acquisition of Capcoil in
      May
      and increased our capability and capacity in production stimulation. Capcoil
      is
      also engaged in down hole well services and provides coil tubing services,
      again, to enhance production of oil and gas in existing wells. During the third
      quarter, this new segment produced revenues of $3.2 million and an operating
      loss of $128,000. We look at this quarter loss as if it were an investment
      because during the third quarter, we incurred costs to expand our international
      presence for these services, both offshore and in Argentina. 

    

    Another
      one of our new reporting segments is rental tools. Since the purchase of Safco’s
      rental tool business in September, 2004, we have focused on profitably growing
      this business. This is a capital intensive business, but the operating margins
      in this segment are extremely strong. During the third quarter, on revenues
      of
      $1.6 million, we produced $450,000 in income from operations, which really
      means
      we’re generating operating margins of over 29% on revenues. These results
      include the impact on both revenue and earnings that we generated from Delta’s
      rental tool business, which was acquired in April, 2004. But the greatest
      achievement of the quarter was the ability to see our dedicated management
      team
      at work and the commitment of our operators. The devastation of the hurricanes
      did not deter Dave Wilde and his operating team in restoring operations quickly,
      handling the personal needs of our employee base, and facing the many customer
      operating challenges, and yet producing a quarter with record revenues, record
      operating profits, record EBITDA, and record net income. Dave, I want to take
      this time to thank you, personally, for your commitment and
      dedication.

    

    I
      would
      now like to turn it over to Vic. Vic, as I mentioned earlier, is our Chief
      Financial Officer.

    

    
      	Victor
              Perez:	
              Thanks,
                Micki, and thanks to all of you, again, for participating in the
                call with
                us this morning. 

            

    

    

    
      
         

      

      
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          5

        
          

        

      

      
         

      

    

    As
      you
      saw from the announcement, our revenues for the three months ended September
      30,
’05, were $28.9 million, which is an increase of 143.2% compared to $11.9
      million for the three months ended September 30, 2005. Once again, revenues
      increased in each of our operating segments due to our efforts to gain market
      share, expand geographic presence, and begin to reap the benefits of the
      investments we have made in equipment and people. Our gross profit for the
      quarter, which includes depreciation for the quarter ended September 30, 2005,
      increased 124.8% to $8.2 million or 28.5% of revenues, compared to $3.7 million
      for the prior quarter of September 30, 2004, or 30.8% of revenues. Included
      in
      our cost of revenue is depreciation which increased 135.4% in the third quarter
      to $1.4 million, compared to $591,000 in last year’s third quarter. And, of
      course, this is attributable to the acquisitions and the investment that we’ve
      made in equipment. 

    

    Our
      G&A expense was $4.3 million in the third quarter of 2005, compared to $2.2
      million for the third quarter of 2004. As a percentage of revenues, our G&A
      did go down to 14.7% of our revenues compared to 18.7% last year. We have seen
      increases in our G&A as a result of the acquisitions, as well as the hiring
      of additional sales and administrative personnel to help increase our market
      share, our customer base, and manage our growth. We’ve also seen increased legal
      and accounting fees and other expenses related to our financing and acquisition
      activities, as well as general consulting and other professional fees related
      to
      the administration of our growth, as well as strengthening of our internal
      controls.

    

    Income
      from operations for the three months ending September 30, 2005, totaled $3.5
      million, which is an increase of 184.4% compared to the year ago quarter which
      was $1.2 million. Due to our strong revenue, quality gross profit and
      effectively managing our expenses despite strong growth, net income attributed
      to common stockholders was $1.3 million for the third quarter of 2005, which
      is
      an increase of 149.1% compared to net income attributed to common stockholders
      of $519,000 for the third quarter of ’04. I want to point out that these
      results, the net income for the quarter ended ’05, included a $1.1 million in
      debt retirement expenses associated with the prepayment of our previous
      financing which was replaced by our expanded new credit agreement that Micki
      spoke about a little bit earlier. Excluding these expenses, net income would
      have been approximately $2.4 million for the quarter.

    

    We
      reported third quarter earnings per diluted share of $0.08, reflecting a 60%
      increase versus last year’s third quarter which was $0.05 per diluted share.
      Again, excluding the impact of the debt retirement expenses, earnings per
      diluted share were up 180% to $0.14 per diluted share. I would also like to
      point out and mention that EBITDA, which is a non-GAAP item, a non-GAAP term
      that is defined in the Press Release, was $5.4 million for the third quarter,
      compared to $2 million for the third quarter a year ago. Our EBITDA was
      approximately $13.4 million for the nine months ended September 30, 2005.

    

    At
      this
      point, I would like to go over a few items on the balance sheet. On September
      30, as you saw, we had approximately $3.9 million in cash and $56.1 million
      in
      debt. Our debt to capitalization, which is defined as net debt to total
      capitalization stood at around 48%. I might mention that on a debt to EBITDA,
      if
      you look at our run rate for the third quarter annualized, it’s a run rate of
      EBITDA of $21.6 million of which is basically a ratio of debt to EBITDA of
      approximately 2.4 times the debt that we have at the end of the quarter. As
      Micki mentioned, during the quarter, we made significant strides in enhancing
      our financial flexibility and strengthening our balance sheet. And as he
      mentioned, we entered into a new $55 million bank credit facility in early
      July.
      This facility includes a $13 million revolver which has $3.7 million currently
      outstanding and $9.3 million in availability.

    

    
      
         

      

      
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    In
      our
      Press Release today, we increased our full year guidance and provided guidance
      for our fourth quarter. For 2005 full year, we now anticipate producing revenue
      in a range of approximately $100 million to over $104 million for the year
      and
      generating EBITDA of $18.8 million to $20 million for the year 2005. We also
      anticipate earnings per diluted share for the year of a range of $0.41 to $0.47.
      Excluding the impact of the refinancing charges in the third quarter, we
      anticipate earning between $0.47 and $0.53 per diluted share for the full year
      2005. For the fourth quarter, we project that we will generate $28 million
      to
      $32 million in revenues and also $5.5 million to $6.5 million in EBITDA and
      a
      range of $0.11 to $0.17 in earnings per diluted share. 

    

    At
      this
      point, I’ll turn it back over to Micki.

    

    
      	Micki
              Hidayatallah:	
              Thank
                you, Vic. And we will now open it up to questions and answers. And
                please
                state who - - all three of us are available, so if you could state
                who the
                question is addressed to, I will appreciate it. And before that,
                I am
                going to just open it up. Thanks.

            

    

    

    
      	Operator:	
              Thank
                you, sir. Ladies and gentlemen, at this time we will begin the question
                and answer session. If you have a question, please press the star
                followed
                by the one on your pushbutton phone. If you wish to decline from
                the
                polling process, please press the star followed by the two. You will
                hear
                a three-tone prompt acknowledging your selection. Please ask one
                question
                and one follow-up and re-queue for additional questions. If you are
                using
                speaker equipment, you will need to lift the handset for pressing
                the
                numbers. One moment for first
                question.

            

    

    

    Our
      first
      question comes from Beau MacKenzie with Sanders Morris and Harris. Please go
      ahead.

    

    
      	Beau
              MacKenzie:	
              Hi.
                In terms of potential growth looking further out, where would you
                say that
                you would be focused on further acquisitions as they come available?
                Would
                we see more assets brought in to support directional further expansion
                of
                compressed air drilling, or can you give me a view on what you’re seeing
                out there and what the multiples on acquisitions of the size that
                you guys
                are looking at or going for in the market place right now?
                Thanks.

            

    

    

    
      	Micki
              Hidayatallah:	
              Well,
                we want to continue to, obviously, grow all the segments of our business,
                initially through acquisition and then organically after integration.
                The
                greatest opportunities, we believe, lie in our ability to get access
                to
                increase rental tool capability. As I stated in the main presentation,
                our
                EBITDA earnings and our returns of operating income are far greater
                in
                that segment. Today, that represents a very small percentage of both
                our
                revenues and our operating income contributions. We would like to
                see that
                increase substantially and really balance our rental offerings and
                our
                services offerings. However, in the casing and tubing segments, as
                well as
                the under-balanced drilling, we continue to grow our capacity by
                getting
                access to increased capabilities in equipment, either through acquisitions
                of operating businesses or through just asset purchases and the same
                in
                the under-balanced drilling segment.

            

    

    

    On
      directional drilling, we’ve increased capacity by adding drillers, by increasing
      our motor capability, but most of the growth will be organic. And the same
      applies to our production stimulation business. We will invest in equipment
      and
      increase capacity both in coil tubing units as well as capillary coil tubing.
      We
      try and do, wherever possible, accretive acquisitions. I think the question
      is
      leading up to is that with this tremendous surge in rig activity, is it possible
      to continue to buy acquisitions that are accretive? And we believe that if
      we
      look at our last three to five acquisitions, they continue to be in the range
      of
      a multiple of EBITDA of between 4 and 6, and 6 is really the high end. Most
      of
      them were between 4 and 5, and so there is availability. I’m going to let Dave
      address this also that we’re not out there buying companies that are being
      auctioned. We’re out there looking for companies that we’ve had relationships
      with and that really want to join the Allis-Chalmers family, they like the
      culture and they know the management. Dave, would you like to also add to that
      answer?

    

    
      
         

      

      
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          7

        
          

        

      

      
         

      

    

    
      	David
              Wilde:	
              Yes.
                Most of the companies that we’ve acquired, either myself or someone on our
                team has worked with, known or competed against most of these individuals
                or their whole management and sales teams. We like - - when we acquire
                a
                company, of course we look for companies that fit into our five segments.
                But we like these companies to be solid from top to bottom personnel
                wise,
                because we are a service company. We don’t want to re-invent the
                wheel.

            

    

    

    
      	Beau
              MacKenzie:	
              Now,
                is it possible that, now that you guys have expanded into a few more
                areas, to find acquisitions that fit in - - I hate to use the term,
                but a
                more synergistical way such as rental tools that better support your
                directional drilling operations. Do you eliminate some of the needs
                for
                outside uses of non-mag drill pipe of (INAUDIBLE) openers, things
                like
                that. Are there things of that nature? Is that part of the strategy
                going
                forward, or is it just more opportunistic to try to fill out the
                ones that
                are there?

            

    

    

    
      	David
              Wilde:	
              Well,
                as far as directional drilling, there’s only a few rental tools involved
                in that and most of them are non-magnetic. There’s only a few players in
                the non-magnetic business. One of the majors being Gam Alloy which
                we have
                a very good affiliation with. The rental tools, basically, rental
                tools
                are used on all - - on almost every well. That’s our main focus there. As
                far as the synergies, we do have synergies. If you look at our Air
                Comp,
                our under-balanced drilling group, there’s a lot of directional wells
                drilled with air. There’s more and more of them. The under-balanced
                drilling and directional drilling are the two fastest growing segments,
                we
                believe, in the service industry. So if you look at our five segments,
                there’s synergies between all of them. The casing and tubing business,
                we
                like that because every well drilled has to have casing installed.
                And
                every well that’s producible has to have tubing installed. If you look at
                it from the big picture, add production services into the mix, we
                have a
                philosophy. We want to be balanced in rental tools and service, domestic
                and international, and production and drilling. So there is a synergy
                to
                all five of our segments.

            

    

    

    
      	Beau
              MacKenzie:	
              Alright.
                Thanks a lot.

            

    

    

    
      	David
              Wilde:	
              Thank
                you.

            

    

    

    
      	Operator:	
              Thank
                you. Our next question comes from Steve Emerson with Emerson Investment
                Group. Please go ahead.

            

    

    

    
      	Steve
              Emerson:	
              First
                of all, congratulations for an incredible quarter to the whole team.
                David
                Wilde, I would greatly appreciate a picture, perhaps, of ’06 internal
                expansion objectives. I notice that your Q4 guidance would be a run
                rate
                of $120 million in revenues and EBITDA of about $24 million. And,
                of
                course, Micki, I would love your comment as
                well.

            

    

    

    
      	Micki
              Hidayatallah:	
              Dave,
                do you want to start?

            

    

    

    
      
         

      

      
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          8

        
          

        

      

      
         

      

    

    
      	David
              Wilde:	
              Sure.
                ’06, like we just stated, we’re going to grow the rental tool business.
                We, as part of our plan, to achieve hopefully an equal mix between
                rental
                and service, we’d have to greatly expand that end of the business to get
                there to achieve that. Directional drilling, we’ll keep growing it
                organically. As you know, I believe in 2002, our revenue for directional
                drilling was $6.8 million. Looking at it as you see today, the revenue,
                we
                believe, is going to be in the $40 million range. We would like to
                grow
                that incrementally. We’re going to grow our casing and tubing running
                business and our tubular services business both by acquisition and
                organically. And, actually, aside from the asset purchase in September
                1st
                in
                the tubular services business, that whole division was grown organically,
                as well as the directional portion of the business. We want to expand
                internationally, so I hope that answers your question. We’re going to grow
                organically. We’ll locate and find accretive acquisitions and expand into
                the international arena even more. 

            

    

    

    
      	Steve
              Emerson:	
              Okay.
                Micki, perhaps you can, at this point, if you are ready to perhaps
                put
                some brackets on internal growth or give us some flavor as to purely
                objectives.

            

    

    

    
      	Micki
              Hidayatallah:	
              Well,
                I think, just to talk about pure objectives, we would like to next
                year,
                on pure organic growth, and as you know, it’s fairly dependent on what
                happens with rig activity, but we are estimating that the EMP operators
                will next year continue to increase their investment in capital
                expenditures and that we’re forecasting a 6% to 12% increase in investment
                next year. It is difficult to continue to project internal - - our
                ability
                to grow organically with the issue and problem of drilling rig
                availability and accessibility. This is becoming an acute problem
                for the
                operators. It is becoming increasingly difficult to access rigs.
                

            

    

    

    But,
      to
      set ourselves internal objectives, we believe that with the environment as
      it is
      today, with the visibility that we have in EMP operators for capital
      expenditures next year, that we should be able to continue to grow organically
      at a rate that is faster than the rate of growth in the rig count. We would
      like
      to see internally a rate of growth that’s in the 10% to 15% range, purely from
      organic growth. And if our revenues grow by this percent and we continue to
      maintain overhead at levels we believe are effective, we should see an
      increasing benefit in EBITDA, operating income, and net income, because the
      incremental dollar will produce greater margin contributions on a gross margin
      level.

    

    
      	Steve
              Emerson:	
              And,
                finally, would that 10% to 15% include any further price
                increases?

            

    

    

    
      	Micki
              Hidayatallah:	
              Well,
                this year, again, we have really leveraged pricing flexibility due
                to the
                limited access to equipment and the services we offer. Again, we
                feel the
                situation will continue next year. And I was really more addressing
                unit
                growth rather than pricing or price increases. I am certain that,
                again,
                this is something that we’re fairly conservative on projections, but our
                management team continues to review and to evaluate our costs, market
                competitive prices and see where the opportunities arise. So, again,
                those
                evaluations will take place. We have not completed our strategic
                operating
                plan for next year. But, definitely, we will review pricing
                structures.

            

    

    

    
      	Operator:	
              Thank
                you. Ladies and gentlemen, if you have an additional question, please
                press the star followed by one. And if you are using speaker equipment,
                you will have to life the handset before pressing the numbers. One
                moment
                for our next question.

            

    

    

    Ladies
      and gentlemen, once again, if you have an additional question, please press
      the
      star followed by one. And please ask one question and one follow-up and re-queue
      for additional questions. One moment for the next question.

    

    
      
         

      

      
        Page
          9

        
          

        

      

      
         

      

    

    The
      next
      question comes from Chris Engle with Mercanty Capital. Please go
      ahead.

    

    
      	Alex:	
              Hi,
                I’m Alex on behalf of Chris Engle. Given the secular nature of the
                energy
                business, do you have any plans to expand into the international
                markets?

            

    

    

    
      	Micki
              Hidayatallah:	
              Yes.
                One of the things that Dave addressed was the necessity to balance
                our
                portfolio of services, and that balance included, as he said, between
                rental and services, production and drilling, and domestic and
                international. We continue to feel that as energy today is a global
                commodity that it is necessary for us to grow outside the domestic
                markets
                and to look at opportunities internationally where we think the driving
                forces of the drivers that drive sovereign oil companies make commitments
                for capital expansion and increased rig activity are much different
                internationally than they domestically. Countries make long-term
                economic
                plans based on aggregate dollars rather than the cost per barrel
                and their
                capital expenditure commitments are made well in advance. In the
                event
                that there was any downturn in the pricing of the commodity, we believe
                the international markets provide a greater safe haven than the domestic
                markets. In addition, as the oil field matures in the United States,
                you
                have to begin looking at greater drilling opportunities in the
                international market. So we will continue to evaluate these
                opportunities.

            

    

    

    
      	Alex:	
              Thank
                you.

            

    

    

    
      	Operator:	
              Thank
                you. Our next question comes from Peter Trapp with (INAUDIBLE) Partners.
                Please go ahead.

            

    

    

    
      	Peter
              Trapp:	
              Yes.
                Hi, Micki.

            

    

    

    
      	Micki
              Hidayatallah:	
              Hi,
                Peter. How are you?

            

    

    

    
      	Peter
              Trapp:	
              Fine.
                Great quarter. Congratulations. Listen, my question is a follow-up
                on the
                international side, because I guess for many people at international,
                one
                thinks of India, Nigeria, the North Sea, etc., and as an Englishman,
                as I
                think of international, I think of Canada and Mexico as well. And
                so I
                just wanted to circle back and ask you more specifically what geographical
                areas you are referring to when you talk about international because,
                in
                my opinion, there’s some very interesting opportunities up in Canada right
                now.

            

    

    

    
      	Micki
              Hidayatallah:	
              Well,
                thank you, Peter. Again, when we talk about the international markets,
                we
                definitely do include opportunities in Canada and increased opportunities
                in Mexico. Mexico, we believe, is going to become a very important
                trading
                partner for energy with the United States. And, again, there are
                issues in
                Venezuela today. But we think that, eventually, Venezuela being part
                of
                the family of the Americas, is going to become a trading partner.
                You have
                the whole of South America that will participate in that.
                

            

    

    

    
      
         

      

      
        Page
          10

        
          

        

      

      
         

      

    

    The
      greatest opportunities obviously are in those countries that today are not
      actively trading with the United States. But they’re also in regions that are
      fairly destabilized and operations there are difficult. And here, I’m referring
      more to the Middle East, more specifically, Iraq, which has huge untapped
      reserves, so West Africa, again, growing market becoming a huge source of
      supply, and China and India going in fairly heavily to access those reserves.
      So
      we think that the future of all oil field services companies has to be when
      you
      consider the marketplace as a single, global marketplace, and we have to create
      opportunities, if we want to grow at the rate we’ve been growing historically,
      we have to consider the international marketplaces, including, as you said,
      Canada and Mexico.

    

    
      	Operator:	
              Thank
                you. Do you have any further
                questions.

            

    

    

    
      	Peter
              Trapp:	
              No.
                That’s fine. Thank you.

            

    

    

    
      	Operator:	
              Our
                next question comes from Stacy Newout with Pickering Energy Partners.
                Please go ahead.

            

    

    

    
      	Barron
              Pope:	
              It’s
                actually Barron Pope.

            

    

    

    
      	Micki
              Hidayatallah:	
              Hello.

            

    

    

    
      	Barron
              Pope:	
              How
                are you guys doing? I have a quick question with the acquisitions
                that
                have been done this year and, most recently, with the acquisition
                of the
                casing and tubing installation equipment from RPC. Just wondering
                if you
                could help us think about incrementals the way you all do, i.e.,
                for the
                businesses that you have in-house now on a go forward basis, if we
                look
                out to ’06 and assume no incremental acquisitions, what type of
                incremental margins can your core businesses do? And I’m thinking
                specifically about the directional business and casing and tubing
                and
                compressed air drilling.

            

    

    

    
      	Micki
              Hidayatallah:	
              Okay.
                Well, each of those have different dynamics and opportunities. But
                let me
                begin by talking about the casing and tubing RPC acquisition. As
                you know,
                that acquisition was completed on September 1st,
                and it was an acquisition of assets. And we acquired those assets
                with no
                customer lists, no operating locations, and began operations on September
                1st.

            

    

    

    
      	Barron
              Pope:	
              Okay.

            

    

    

    
      
         

      

      
        Page
          11

        
          

        

      

      
         

      

    

    
      	Micki
              Hidayatallah:	
              We
                hired the personnel, started accessing customers in the face of losing
                substantially all of the offshore opportunity, and started operations.
                The
                people we hired below the gross margin line were simply administrative,
                a
                single accounting office manager, we call them administrators, about
                - -
                Dave, was it five salesmen?

            

    

    

    
      	David
              Wilde:	
              Six.

            

    

    

    
      	Micki
              Hidayatallah:	
              Six
                salesmen, and an operating executive. But the rest was all at the
                gross
                margin level. And every dollar of incremental revenues that we had
                contributed to the gross margin, because the increase was a variable
                cost
                in the form of operators. And the percentage that grew on the fixed
                overhead was very small. Now what is this in real terms? We believe
                that
                prior to the acquisition, and you’ve got to consider the effect of the
                hurricanes and what we were operating on. But prior to the hurricanes,
                our
                domestic operations had an EBITDA contribution from revenues of around
                10%. 

            

    

    

    
      	Barron
              Pope:	
              Okay.

            

    

    

    
      	Micki
              Hidayatallah:	
              We
                believe that after the acquisition, the EBITDA contribution, compared
                to
                revenues, was in the 20% region.

            

    

    

    
      	Barron
              Pope:	
              Okay.

            

    

    

    
      	Micki
              Hidayatallah:	
              So
                we’ve literally doubled up.

            

    

    

    
      	Barron
              Pope:	
              Okay.

            

    

    

    
      	Micki
              Hidayatallah:	
              Does
                anyone else want to add to that, Vic or
                Dave?

            

    

    

    
      	David
              Wilde:	
              It
                was - - what it did was, our domestic operations prior to the acquisition
                of the RPC assets were mainly in the case and running end of the
                business.

            

    

    

    
      	Barron
              Pope:	
              Okay.

            

    

    

    
      	David
              Wilde:	
              Where
                RPC was strong was in the high end tubing running business. They
                had the
                expertise, the equipment, and the offshore locations to attack the
                higher
                margin chrome tubing and premium tubing running business. Also, they
                had a
                hammer division where the hammer division was an entrée into the offshore
                market. So it really added to our domestic operations.
                

            

    

    

    
      
         

      

      
        Page
          12

        
          

        

      

      
         

      

    

    
      	Barron
              Pope:	
              Okay.
                And then one additional question on the directional drilling services
                segment. Dave, I tend to agree with your comment about the fastest
                growing
                segment of the oil patch being the demand for directional drilling
                services. I’m just wondering, I know you all have a critical mass of
                directional drillers, but can you see a huge up-tick in the number
                of
                wells that are drilled directionally year over year when the bottleneck
                seems to be the directional driller, i.e., the person who actually
                has
                that skill set to drill those un-vertical
                wells?

            

    

    

    
      	David
              Wilde:	
              Yes,
                I do. And the directional drillers that we have, with the exception
                of
                about three trainees right now and seven second tier guys that came
                off of
                our training program, we have some of the highest quality directional
                drillers in the world. They’re - - probably 90% of our directional
                drillers, 85% - 90% are your top tier, number one directional drillers.
                What happens is as we train these people as they come on board -
                - we just
                hired a salesman last week who was in the directional drilling business
                for about twenty years. He’s bringing over about eight quality, top tier
                directional drillers. I don’t think there will be a bottleneck because
                people are going to drill directional wells no matter what. They
                have to.
                Whether there’s a geographic problem or a target problem or whatever, and
                they’re going to have problems. And as we train these people, as we
                acquire these lead hands, as we call them, as these people have -
                - as
                these EMP companies have problems with understaffed, under-skilled
                directional drillers, we’ll fill in the gap and we’ll grow that business
                rapidly as we’ve proven over the last 3.5
                years.

            

    

    

    
      	Barron
              Pope:	
              Okay.
                Thanks, guys.

            

    

    

    
      	David
              Wilde:	
              Thank
                you.

            

    

    

    
      	Operator:	
              Thank
                you. At this time, I show no further questions. I’d like to turn the
                conference back over to Mr. Hidayatallah for any concluding
                remarks.

            

    

    

    
      	Micki
              Hidayatallah:	
              Again,
                I want to take this opportunity for thanking all of you for showing
                an
                interest in our company. I also want to thank our management team
                and our
                employee stockholder base for their continued dedication and commitment
                to
                the growth of our company in both - - especially on a profitability
                basis.

            

    

    

    Again,
      thank you all.

    

    
      
         

      

      
        Page
          13

        
          

        

      

      
         

      

    

    
      	David
              Wilde:	
              Thank
                you.

            

    

    

    
      	Victor
              Perez:	
              Thank
                you.

            

    

    

    
      	Operator:	
              Thank
                you. And ladies and gentlemen, this conclude the Allis-Chalmers Energy
                Third Quarter Earnings conference call. If you would like to listen
                to the
                replay of today’s conference, you may dial 303-590-3000 or 1-800-405-2236,
                and you will need to enter the access code of 11043354, followed
                by the
                pound sign. Once again, thank you for participating in today’s conference.
                At this time, you may now disconnect.

            

    

     

     

    END

     

     

     

     

    Page
      14<PAGE>

EXHIBIT 10.1

<TABLE>
<S>     <C>
BECKMAN COULTER - LEASE PLAN
                                                                                                       AGREEMENT
----------------------------------------------------------------------------------------------------------------

DATE:       08/08/2005                                                       CUSTOMER PROPOSAL #:  142343
      --------------------                                                                       ----------
                                                                                      CUSTOMER #:  LSSF000
                                                                                                 ----------

  ------------------------------------                                       -----------------------------------
    BILL TO                                                                    SHIP TO
    -------                                                                    -------
        MicroIslet Incorporated                                                    MicroIslet Incorporated
        Attn: Accounts Payable                                                     6370 Nancy Ridge Dr. Ste 112
        6370 Nancy Ridge Dr. Ste 112                                               San Diego, CA 92121
        San Diego, CA 92121
  ------------------------------------                                       -----------------------------------

EQUIPMENT DESCRIPTION
-------------------------------------------
                          SYSTEM                                 P/N            QTY              LIST PRICE
   ----------------------------------------------------      -----------     ---------      --------------------
   1.   Cytomics FC 500 Cytometer w/ UPS Demo*                 626553            1               $152,500.00
   2.   CXP Acquisition Software Demo                          629637            1                $10,000.00
   3.   Power Regulator Demo                                   5609058           1                 $1,012.00
   4.   Pentium 4 FlowCentre Workstation Demo                  625830            1                 $6,269.00
   5.   HP 2280 Color Printer Demo                             2016953           1                 $1,800.00
   6.   17" NEC LCD Display                                    2016938           2                 $4,158.00
   7.   CXP Analysis Software Five User                        629642            1                 $5,000.00
   8.   Additional Year Business Hours Service Coverage        999064            1                $16,695.00

   DEMO FC 500 SERIAL# AJ12063 IS CURRENTLY ON SITE.

        PENDING FINAL CREDIT APPROVAL

                                                                                            --------------------
                                                                               Total List:       $197,434.00
                                                                                 Trade In:             $0.00
                                                                                 Discount:       ($91,440.00)
                                                                           INSTRUMENT NET:       $105,994.00

================================================================================================================
TERM/TOTAL INVESTMENT
-------------------------------------------

         36               $3,466.00                  $0.00                   $0.00              $3,466.00
     -----------     -------------------     -----------------------     -------------    ----------------------
        Term            Monthly System       Monthly Service Payment        Security          Initial Payment
     # of Months           Payments              (if included)              Deposit        (1st month & deposit)

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

ACCEPTANCE
-----------------------------

Beckman Coulter, Inc. (Lessor)                                          Customer (Lessee)

/s/ RANDY GAEBLER                                                       /S/ HARO HARTOUNIAN
-----------------------------------------------                         -----------------------------------------------
Beckman Coulter Authorized Official                                     Authorized Signature

RANDY GAEBLER, DIRECTOR                                                 HARO HARTOUNIAN, PRESIDENT
-----------------------------------------------                         -----------------------------------------------
Print Name & Title                                                      Print Name & Title

8-23-05                                                                 8-10-05
-------------------------                                               -------------------------
Date                                                                    Date

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

[BECKMAN COULTER LOGO]
</TABLE>

<PAGE>

                                  SYSTEM LEASE

1. DEFINITIONS

         "Customer" means the parry identified on the face of this Agreement.
"BCI" means Beckman Coulter, Inc. "System" means the instrument(s), options and
accessories selected by Customer and specifically identified on the face of this
Agreement, together with all replacement parts, repairs, additions, and
substitutions. "Effective Date" means the date on which an authorized
representative at BCI's headquarters accepts this Agreement as provided in
Article 5.A. "Reagents" means the BCI reagents, calibrators, controls, buffers
and diluents to be provided by BCI to Customer in accordance with the terms of
this Agreement. "Supply items" means BCI sample cups, pipettes and other use and
maintenance supplies. "Test" means each analyte measurement on a patient sample
(including repeats), control (including proficiency samples and linearity
standards) or calibration performed on the System. "Reportable Test" means each
analyte measurement on a patient sample (including repeats) and control
(including proficiency samples and linearity standards) performed on the
System. "Outcome" means each analyte measurement on a patient sample (including
repeats), control (including proficiency samples and linearity standards) or
calibration performed on the system, with a 10% reduction for "shared risk"
controls, calibrations and reruns. (Outcome=total tests multiplied by 90%.)
"Term Commencement Date" means the date specified on the face of this Agreement
adjacent to "Term Commencement Date". "Term" means the period that starts on the
Term Commencement Date and continues for the period stated an the face of this
Agreement adjacent to "Term" plus any extension for an Interim Period as
provided by Article 3. "Plan Month" means each month of the Term measured from
the Term Commencement Date monthly anniversary or, if an Interim Period applies
as provided by Article 3, the Meter Date (defined in Article 3). "Total Monthly
Investment" means the amount indicated on the face of this agreement adjacent to
that expression.

2. LEASE

         A. THE SYSTEM. BCI hereby leases to Customer, and Customers hereby
leases from BCI, the System. The System may either consist of new equipment or,
if indicated on the face hereof and Customer's purchase order, may consist of
used equipment.

         B. TITLE, SECURITY INTEREST. Title to System is and shall remain with
BCI. Customer will attach such labels as BCI may direct to show that the leased
System is owned by BCI. Customer hereby grants BCI a security interest in the
System, and BCI shall retain a security interest in the System until Customer
has made all payments to BCI required by this Agreement. Customer agrees to
cooperate with BCI in perfecting and maintaining BCI's security interest,
including the preparation, signing and filing of UCC financing statements.
Customer agrees that BCI is authorized, at its option, to file financing
statements or amendments thereto without the signature of Customer with respect
to any or all of the System and, if a signature is required by law, Customer
appoints BCI as Customers attorney-in-fact to execute any such financing
statement. BCI may assign or reassign its security interest in whole or in part,
without prior notice to Customer. Customer shall recognize each such assignment
and shall not assert against the assignee any defense, off-set or counterclaim
that Customer may have against BCI. Customer agrees that the System is and shall
remain personal property; that the System shall not be affixed or attached to
real property or any improvements thereon; and that Customer shall not sell,
secrete, mortgage, assign, transfer, lease, sublet, loan, part with possession
of, or encumber its interest in this Agreement, the System or any interest
therein, or permit any liens or charges to become effective thereon or permit or
attempt to do any of the acts aforesaid

         C. INSURANCE, LOCATION, OPERATION, RISK OF LOSS. Throughout the
duration of this Agreement Customer agrees: (i) to promptly pay all taxes,
assessments, license fees and other charges when levied or assessed against the
System or the ownership or use thereof; (ii) to immediately discharge any lien
other than BCI's that may arise or attach to the System; (iii) to insure the
System for full replacement value for all risks of loss; (iv) to not remove the
System or any part thereof from the "Ship to" location stated on the face
hereof; (v) to not misuse or abuse System; (vi) to not make any alterations,
additions or improvements to the System without the prior written consent of
BCI; and (vii) to assume the entire risk of loss or damage to System from any
cause from the date of shipment to Customer until its return to BCI, whether or
not covered by insurance. The occurrence of any such loss or damage shall not
relieve Customer of its obligations hereunder.

<PAGE>

         D. LICENSE TO COMPUTER SYSTEM AND SOFTWARE. All computer software
and/or programs, regardless of storage media, and all copies thereof, provided
with the System and/or provided by BCI from time to time during the term of this
Agreement (jointly and severally the "Software") shall at all times be and
remain the sole and exclusive property of BCI. BCI grants to Customer and
Customer accepts a limited, non-exclusive license to use the Software only in
conjunction with its operation of the System and only in accordance with BCI's
current operation and use instructions for the System. Customer shall not copy
or permit others to copy the Software or any portion thereof. Customer shall
return the Software to BCI on receipt from BCI or any third party of any
improved, enhanced or replacement Software. The license granted herein expires
at the end of this Agreement and may be terminated earlier by BCI: (a) upon
BCI's cancellation of this Agreement under Article 5.E., or (b) Customers
violation of any of the provisions of this Article 2.D. Customer may not
transfer the license granted hereunder to any third party.

3. PAYMENTS

         As indicated on the face of this Agreement, Customer will either pay
rental payments under Article 3.A. or metered System invoices under Article 3.B.

         A. RENTAL PAYMENTS. Customer shall pay to BCI the rental payment amount
shown on the face of this Agreement for each Plan Month.

         B. METERED SYSTEM PLAN. Customer shall send accurate, timely monthly
meter readings to BCI within three (3) days after the end of Plan Month. BCI
shall make monthly shipments of replenishment Reagents and Supply Items based
upon Customers volume of Tests and System usage as recorded by metering software
of the System. Depending upon whether the "Per Test", "Per Reportable" or "Per
Outcome" charge system has been indicated on the face of this Agreement, each
Plan Month charges shall accrue as shown by the metering software according to:
i) the charge per Test for the Tests actually performed in that month; or ii)
the charge per Reportable Test for the reportable results generated in that
month; or, iii) the charge per Outcome for the billable results generated in
that month.

         On the date BCI ships the System, BCI shall invoice Customer the Total
Monthly Investment. At the end of each Plan Month, BCI shall review Customers
total per Test/Reportable/Outcome charges accruing during that month. Customer
will be invoiced the greater of the per Test/Reportable/Outcome charges that
have accrued or the Total Monthly Investment. At the end of the last Plan Month
of the Term, Customer only shall be invoiced the amount by which the per Test
charges accruing that month exceed the Total Monthly Investment (this will be
invoiced only it the difference is a positive number). If meter data is not
received from Customer within seven (7) days after the end of the Plan Month,
the Total Monthly Investment will be invoiced, and a supplemental invoice will
be tendered upon receipt of the meter data if the per Test/Reportable/Outcome
charges for that Plan Month exceed the Total Monthly Investment. If the meter
data for a Plan Month should not be readable, the Total Monthly Investment will
apply for that Plan Month.

         For its convenience, Customer may request BCI to establish a meter read
date that will commence the initial Plan Month after the Term Commencement Date.
If BCI agrees with the request, then (i) BCI will set the meter read date as
requested, (ii) the Term will be extended by the number of days between the
meter read start date ("Meter Date") and the Term Commencement Date (the
"Interim Period"), (iii) the first Plan Month will begin on the Meter Date and
subsequent Plan Months will begin on each monthly anniversary of the Meter Date
during the Term, and (iv) BCI will invoice Customer an amount equal to (x) the
number of days in the Interim Period divided by (y) thirty (30), times (z) the
Total Monthly Investment.

         At any time, BCI may compare the quantities of Reagents and Supply
Items shipped to Customer against the quantities indicated by BCI standards for
the number of Tests recorded by the metering software. Reagents and Supply Items
delivered in excess of BCI standards may be invoiced at the list prices then in
effect.

         C. SECURITY DEPOSIT. Customer shall pay any security deposit shown on
the face of this Agreement upon the signing of this Agreement by Customer. Any
security deposit may be applied, at BCI's discretion, to any past due obligation
of Customer and to the extent not so applied, shall be returned to Customer,
without interest at the end of this Agreement.

<PAGE>

4. SERVICE

         If indicated on the face of this Agreement, BCI shall during its
regular business hours, and subject to the remainder of this Article, make all
necessary repairs and replacements to maintain the System in good working order.
The foregoing obligation of BCI is specifically conditioned upon Customers
compliance with Article 2.D. hereof. Repairs and replacements arising as a
result of: (i) Customers failure to properly perform the services and
maintenance required in the Operator's Manual, or (ii) from repairs by persons
other than BCI service personnel, or (iii) replacements with other than genuine
BCI parts, or (iv) from Customers negligence or negligent operation of the
System, or (v) from alterations or modifications to the System made by Customer,
including Customer installation or use of software not provided by BCI
specifically for the System, shall be made only at BCI's discretion and
Customer's expense.

5. GENERAL

         A. EFFECTIVE DATE, DURATION AND RENEWAL. This Agreement is effective
upon acceptance by an authorized BCI Official and ends when the Term and all
Renewal Term(s) have expired, all BCI invoices have been paid in full, and the
System has been returned to BCI. The initial Term is renewed automatically for
additional twelve (12) month terms (each renewal term a "Renewal Term"), unless
Customer gives BCI written termination notice at least ninety (90) days before
the end of the initial Term or any Renewal Term(s). BCI may cancel any automatic
renewal by sending the Customer written notice of termination at least fifteen
(15) days before the commencement of any Renewal Term. At the end of either the
initial Term (if no Renewal Term will continue) or the last Renewal Term,
Customer at its sole expense, shall promptly return the System to BCI at the
location designated by BCI, in the same condition as when received by Customer,
normal wear excepted.

         B. PRICE CHANGES. BCI may change the per Test/Outcome/Reportable and
Service rates from time to time during the term of this Agreement if: (i) The
price change takes effect after the initial twelve (12) months of the Term are
completed; and. (ii) Assuming the same mix and volume as in the twelve (12)
months preceding the change, in aggregate the effect of the change would not
exceed the greater of: (x) the percentage increase indicated for the Medical
Care Expenditure Category in the Consumer Price Index for all Urban Consumers
(unadjusted) from the later of the Effective Date or the effective date of the
last price change to Customer through the end of the month completed immediately
before the effective date of the change, or (y) differences in costs incurred by
BCI for raw materials and/or labor since the later of the Effective Date or the
last price change to Customer. In the event of any Government action which
prevents BCI from making a price change or continuing any price already in
effect, BCI may, on thirty (30) days prior written notice, cancel any portion of
this Agreement requiring BCI to deliver the affected Reagents or to provide
service hereunder. The remainder of this Agreement shall remain in full force
and effect.

         C. BILLING. Each invoice shall be paid by Customer within thirty (30)
days from the date of BCI's invoice. There are no discounts for prompt payment.
Prices stated on the face of this Agreement for the System, the Reagents or any
other goods or services provided to Customer hereunder do not include (i)
delivery and installation charges; or (ii) taxes, duties or other charges levied
by any Government, and any such applicable taxes, duties or other charges will
be added as a separate line item on the invoice unless Customer provides BCI
with satisfactory documentation certifying exempt status. Customer shall pay a
late payment charge equal to one and one-half percent (1 1/2%) per month, or the
highest interest rate permitted by law, whichever is less, of the late
payment(s). If BCI shall have any doubts at any time as to Customer's financial
responsibility, BCI may decline to make further deliveries hereunder except upon
receipt of cash or additional security or on other terms satisfactory to BCI.
Failure of Customer to provide such additional security or comply with such
other terms shall be grounds for BCI to cancel this Agreement in accordance with
the Default provisions hereof.

         D. DELIVERY. This order is subject to availability and will be
processed with reasonable efforts to meet requested delivery dates. BCI is not
obligated to make delivery by any specified date nor liable for damage due to
any delays. Customer shall accept the System and/or the Reagents on delivery.
BCI shall, if required by the operating and service instructions for the System,
install such System at the "Ship To" address on the face hereof.

<PAGE>

         E. DEFAULT. If Customer fails to make any payment specified in this
Agreement within thirty (30) days of the due date, if Customer breaches Article
2.D. of this Agreement, if Customer is in breach of any other obligation under
this Agreement and fails to cure that breach within fifteen (15) days following
notice from BCI, or if any credit or other information submitted by Customer to
BCI be untrue in any material respect, then BCI may, at its option and without
notice or demand, cancel this Agreement. In such event all amounts past due and
to become due under this Agreement shall become immediately due and payable.
Upon such cancellation BCI may issue an invoice to Customer for an amount
including any or all of the following: (i) all past due amounts; and (ii) the
product of (a) the number of months that were remaining in the Term prior to
cancellation by BCI multiplied by (b) either the Total Monthly Investment or the
rental payment amount shown on the face of this Agreement. Customer agrees to
pay such invoice within thirty (30) days of receipt thereof, and to promptly
return, at Customers sole expense and without demand or notice, the System to
BCI at the location designated by BCI, in the same condition as when received by
Customer, normal wear excepted. BCI and Customer acknowledge the difficulty in
establishing a value for the unexpired lease term and owing to such difficulty
agree that the provisions of this paragraph represent an agreed measure of
damages and are not to be deemed a forfeiture or penalty. The foregoing does not
preclude BCI from seeking or enforcing any other right or remedy available to it
under law or in equity and either serially or collectively, and BCI may elect to
suspend deliveries under this Agreement until a breach is cured. BCI's election
to suspend deliveries shall not preclude it from subsequently canceling this
Agreement. BCI shall not be deemed to have waived any rights hereunder by
accepting overdue payments nor shall waiver of the breach of any term of this
Agreement be deemed a waiver of future compliance. During any period Customer is
in default of any provision of this Agreement or is overdue in the making of any
payment, BCI shall be under no obligation to deliver reagents or supplies or to
provide service or to otherwise comply with any of its obligations under this
Agreement. Such BCI nonperformance shall not be construed as a breach of this
Agreement and Customer expressly waives it as a defense in any action. BCI shall
have no obligation, whether under statute or otherwise, to sell, lease or
otherwise use any equipment in mitigation of BCI's damage.

         F. LIMITED WARRANTY. BCI warrants that all instruments, systems and
accessories shall perform in all material respects for twelve (12) months from
delivery as set forth in BCI published product specifications (including any
applicable Year 2000 Statement of Compliance) and operator manuals in effect at
the time of delivery. BCI warrants that all reagents and consumables sold
hereunder shall conform in all material respects to the quantity and content
stated on the label and perform in all material respects consistent with
specifications for the lesser of twelve (12) months from delivery or until the
expiration date set forth on the label. THIS LIMITED WARRANTY IS PROVIDED IN
LIEU OF ALL OTHER WARRANTIES, AND ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR
PURPOSE, ARE EXCLUDED, AND NONE SHALL BE CREATED, WHETHER UNDER THE UNIFORM
COMMERCIAL CODE, CUSTOM, PRACTICE, THE COURSE OF DEALING BETWEEN THE PARTIES OR
OTHERWISE. THIS WARRANTY SHALL NOT BE ALTERED BY THE WARRANTY OF ANY OTHER
PRODUCTS OR SYSTEMS TO WHICH THE SYSTEM OR OPTION MAY BE CONNECTED OR WHICH MAY
BE SUPPLIED BY BCI TO CUSTOMER UNDER THIS OR ANY OTHER AGREEMENT. BCI shall not
be obligated under this warranty if the need for repairs or replacements
directly or indirectly results from Customer's failure to store Reagents as
specified by BCI (including freezer or refrigerator storage) at all times after
delivery or from causes described in clauses i.-v. of Article 4. All
recommendations, statements and technical data regarding BCI's products are
based on tests which BCI believes to be reliable and correct. However, the
accuracy and completeness of such tests and the results thereof are not
guaranteed and are not to be construed as a warranty, either express or implied.
BCI assumes no obligation or liability for the advice given or the results
obtained, all such advice being given and accepted at Customer's sole risk.
Customer's exclusive remedy under this warranty, and BCI's sole obligation to
Customer under this warranty, is the repair or replacement (as selected by BCI)
of the non-conforming goods or services in accordance with this Article 5.F.

         G. LIMITATION OF LIABILITY. BCI shall not be liable for any special,
indirect, incidental or consequential damages, or interruption of business or
loss of profits. BCI's liability under this Agreement or arising from the
manufacture, installation, maintenance, repair or use of any System or Reagents
covered by or furnished under this Agreement, whether in tort, contract or
otherwise, is limited to an amount equal to the annual amount of the Agreement.

         H. AUTHORIZED REPRESENTATIVE. Each of the parties expressly represents
and warrants that the authorized representative signing this Agreement on their
behalf has the requisite authority and has been authorized by the party.

<PAGE>

         I. REGULATORY REQUIREMENTS. Customer acknowledges its obligation to
inform its employees, consultants and associates who will be using the System,
the Reagents and any other BCI products, of BCI's labeling literature and
notices relative thereto which BCI has or may hereafter provide to Customer. If
Customer files any cost reports or claims for reimbursement with federal health
care programs, Customer shall fully and accurately disclose and claim the
amount of any discount included under this Agreement in the fiscal year in which
the discount is earned or the following year, according to any applicable
federal statutes and regulations.

         J. PATENTS. BCI shall defend any suit or proceeding brought against
Customer so far as it is based upon an assertion that the System or any Reagent
furnished by BCI under this Agreement, in and of itself, constitutes a direct
infringement of any United States patent having a claim or claims covering the
System or the Reagent, or the use of such Reagent on the System, if notified
promptly in writing and given authority, information and assistance (at BCI's
expense) for the defense of same, and BCI shall pay all damages and costs
awarded therein against Customer. If use of the System or Reagent, in and of
itself, is enjoined, BCI shall, at its option and at its expense, either (1)
procure for Customer the right to continue using the System and/or Reagent, (2)
replace the same with a noninfringing product, or (3) modify it so it becomes
noninfringing.

         K. FORCE MAJEURE, SHORTAGES. BCI will not be liable for default or
delay, in whole or in part, in the performance of any of its obligations
hereunder due to any cause beyond its control, including, by way of example and
not limitation, Acts of God, accident, fire, flood, storm, earthquake, riot,
war, sabotage, explosion, labor disturbance, strike, national defense
requirement, Governmental law, regulation, rule or ordinance, whether valid or
invalid, inability to obtain energy, raw materials, labor or transportation
under usual prices, terms and conditions, or any similar or different
contingency which would make performance commercially impracticable. Products
affected by such a shortage or event of force majeure may be eliminated from
this Agreement for the duration of that shortage or event of force majeure
without liability, but the Agreement shall otherwise remain in full force and
effect. BCI may during any period of shortage allocate its available supply of
products in any manner which it, in its sole discretion, deems appropriate.

         L. ELECTRONIC ACCESS. At its expense, Customer shall install and
maintain a telephone line or other communications access line requested and
specified by BCI (the "Port"), and shall permit BCI to connect the System to the
Port and maintain a connection between the System and the Port. BCI may use the
Port to gather billing data, to gather consumables replenishment data, to
analyze the performance of the System, to perform diagnostic and maintenance
functions and the like. BCI shall use the Port only for these purposes and shall
not access patient data. To the extent BCI may access or observe patient data
via the Port, BCI shall maintain that patient data in confidence and shall not
disclose that patient data to any third party.

         M. MISCELLANEOUS. No System, Supply Items or Reagents or any other BCI
product may be returned to BCI without a written BCI Return Goods Authorization,
and returns shall be subject to restocking charges . Any notice hereunder shall
be served by registered or certified mail, return receipt requested. The
provisions on the face of the agreement shall take precedence over the
provisions on the reverse surface. This agreement contains the entire
understanding of the parties relative to the subject matter hereof and any
previous or collateral understanding whether oral or written is expressly
superseded. Any representation, warranty, promise or condition which does not
form a part of the writing of this Agreement shall not be binding on either
party. No subsequent waiver, alteration or modification of any term of this
Agreement shall be binding unless in writing and signed by a duly authorized
representative of both parties. Contrary or additional terms and conditions
proposed by Customers purchase order or other correspondence shall not bind BCI.
This Agreement and the rights and duties of Customer under this Agreement are
not assignable or transferable without the express written permission of BCI.
This Agreement shall be governed in all respects by the law of the State of
California, but without regard to any conflicts of law provisions. The terms and
conditions of this Agreement are applicable to each System that may be included
in any Schedule that references this Agreement, is signed by an authorized
representative of Customer and is accepted by an authorized BCI official, and
references in these terms and conditions to the face of this Agreement or the
like shall be interpreted as referencing the applicable Schedule. If any
provisions of this Agreement shall be construed to be illegal or invalid, the
legality or validity of any other provision hereof shall not be affected
thereby. The illegal or invalid provisions shall be severable and all other
provisions shall remain in full force and effect.

Oct. 27, 1998 - NAO-US                                            F06139 (11/98)

<PAGE>

OTHER TERMS AND CONDITIONS
                                                                        PROPOSAL
--------------------------------------------------------------------------------
     CUSTOMER:    MicroIslet Incorporated             PROPOSAL #:    142343
              --------------------------------                   -------------

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                             MAJOR INSTRUMENTATION
   --------------------------------------------------------------------------

   Qty = 1 Cytomics FC 500 w/ CXP Software Demo

   --------------------------------------------------------------------------
                                  MISCELLANEOUS
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   PRICE

   The pricing, warranties, and product configurations provided on this
   quotation are for sale and use in the United States only. This quotation
   expires September 8, 2005. Should customer annual reagent volumes
   substantially decrease, Customer or Beckman Coulter reserves the right to
   renegotiate the contract on a prospective basis. At end of term, the customer
   has the option to purchase all the equipment for $1.00.

   SHIPMENT

   Shipment and invoicing is approximately sixty (60) days from the receipt of
   the purchase order. BCI reserves the right to partially ship against the
   purchase order and invoice only that portion of the purchase order that has
   been shipped. On-site installation will be performed by a factory trained
   technician. Installation includes instrument unpacking, assembly, and
   adjustment to factory specifications. It does not include site preparation.
   Installation of stand alone computers is the responsibility of the customer.

   TERMS

   Terms are net thirty (30) days from date of invoice. FOB ship point. Taxes,
   freight, and insurance are the responsibility of the customer.

   SERVICE

   Two (2) year Business Hours Service Coverage included. Coverage hours are
   Monday through Friday from 8:00 AM to 5:00 PM, excluding holidays. Coverage
   includes parts, labor and telephone support; excludes consumables. Routine
   preventative maintenance is the responsibility of the customer.

   TRAINING

   This quotation includes a week long FC 500 training program for one key
   operator. Training will be performed at the Beckman Coulter, Inc. Education
   Center in Miami Lakes, Florida. Food, lodging, and transportation during the
   training will be paid by Beckman Coulter, Inc. Transportation to and from
   Miami, Florida, is the responsibility of the customer. Training must be
   completed within the first twelve (12) months from the date of instrument
   installation. Customer may purchase additional training slots.

   ON-SITE APPLICATIONS SUPPORT

   Up to two (2) application visits are available during the first year of
   warranty to assist in customization of protocols and procedures. One(1)
   additional applications visit per year is included during any extended
   warranty or service contract period. Additional visits may be purchased at a
   prorated rate plus expenses.

   Please submit original signed documents and purchase order to:
   --------------------------------------------------------------
   Beckman Coulter, Inc
   Attn: Don Kuss M/C 42-CO1
   11800 SW 147th Ave
   Miami, FL 33196
   Fax: 305-380-5797 (front and back)

   Prepared by Don Kuss for Tanya Tolmachoff.
   For additional information call (800)338-8830 ext. 8890.

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[BECKMAN COULTER LOGO]

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