1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q (Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 1999

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

Commission File Number 001-11963

Dailey International Inc.
- -------------------------------------------------------------------------------
(See table of additional Registrants on the following page)
(Exact Name of Registrant as specified in its Charter)

Delaware 76-0503351
- -------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

2507 North Frazier, Conroe, Texas 77303
- -------------------------------------------------------------------------------
(Address of Principal Executive Officers) (Zip Code)

281/350/3399
- -------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)

N/A
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

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
----- -----

Number of shares outstanding of issuer's Class A Common Stock as of May 14, 1999
was 5,129,004. The Company has 5,000,000 shares of Class B Common Stock
outstanding.

DAILEY INTERNATIONAL INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999

INDEX

PART I. FINANCIAL INFORMATION PAGE NO.

Item 1. Financial Statements (unaudited)
Consolidated balance sheets - March 31, 1999 and December 31, 1998 3
Consolidated statements of operations - Three months ended March 31, 1999 and 1998 4
Consolidated statements of cash flows - Three months ended March 31, 1999 and 1998 5
Notes to consolidated financial statements - March 31, 1999 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10-17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17

PART II. OTHER INFORMATION 18

Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K

Signatures 19

3
DAILEY INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)

MARCH 31, DECEMBER 31,
ASSETS 1999 1998
--------- ---------
(UNAUDITED)

Current assets:
Cash and cash equivalents............................. $ 19,185 $ 32,843
Accounts receivable, net.............................. 32,634 32,803
Accounts receivable from affiliates................... 368 362
Prepaid expenses and other current assets............. 3,142 4,778
--------- ---------
Total current assets........................... 55,329 70,786
Revenue-producing tools and inventory, net.............. 136,655 141,524
Property and equipment, net............................. 13,019 13,255
Goodwill, net........................................... 21,979 22,275
Investment in joint venture............................. 7,609 7,100
Other assets............................................ 16,445 17,233
--------- ---------
Total assets................................... $ 251,036 $ 272,173
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued liabilities............... $ 12,426 $ 15,258
Accrued interest on senior notes....................... 3,266 9,797
Income taxes payable................................... 4,682 3,987
Current portion of long-term debt...................... 736 1,048
--------- ---------
Total current liabilities....................... 21,110 30,090
Long-term debt........................................... 275,067 275,060
Deferred income taxes.................................... 5,946 5,910
Other noncurrent liabilities............................. 1,065 1,298
Stockholders' equity (deficit):
Preferred stock, $0.01 par value: 5,000,000 shares
authorized; none issued.............................. -- --
Common stock, Class A, $0.01 par value: 20,000,000
shares authorized; 5,703,655 and 5,703,655 issued
and 5,129,004 and 5,135,504 outstanding at
March 31, 1999 and December 31, 1998, respectively;
Class B, $0.01 par value: 10,000,000 shares
authorized, 5,000,000 shares issued and outstanding
at March 31, 1999 and December 31, 1998,
respectively........................................ 106 106
Treasury stock (574,651 and 568,151 shares at
March 31, 1999 and December 31, 1998,
respectively)....................................... (4,061) (4,048)
Paid-in capital....................................... 53,062 52,437
Accumulated other comprehensive income................ (1,069) (1,026)
Retained earnings (deficit)........................... (100,190) (87,654)
--------- ---------
Total stockholders' equity (deficit)........... (52,152) (40,185)
--------- ---------
Total liabilities and stockholders' equity
(deficit).................................... $ 251,036 $ 272,173
========= =========

See accompanying notes.

DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
------------ ------------

Revenues:
Rental income..................................... $ 9,736 $ 15,691
Sales of products and services ................... 10,993 11,749
Underbalanced drilling services .................. 7,610 10,580
------------ ------------
28,339 38,020
Costs and expenses:
Cost of rentals................................... 8,493 10,055
Cost of products and services..................... 5,666 6,368
Cost of underbalanced drilling services........ 4,864 5,765
Selling, general and administrative............... 7,463 7,528
Depreciation and amortization .................... 6,410 4,628
Reorganization costs.............................. 1,239 --
Non-cash compensation ............................ 55 185
Research and development ......................... 232 79
------------ ------------
34,422 34,608
------------ ------------
Operating income (loss)............................. (6,083) 3,412
Other (income) expense:
Interest income................................... (747) (962)
Interest expense.................................. 6,900 4,494
Equity in earnings of joint venture............... (509) --
Other, net........................................ (272) 125
------------ ------------
Loss before income taxes and
extraordinary item ............................... (11,455) (245)
Provision for income taxes ......................... 1,081 1,460
------------ ------------

Loss before extraordinary item ..................... (12,536) (1,705)
Extraordinary item, net of taxes ................... -- (17,579)
------------ ------------

Net loss............................................ $ (12,536) $ (19,284)
============ ============

Loss per share before extraordinary item:
Basic .......................................... $ (1.24) $ (.18)
============ ============
Diluted ........................................ $ (1.24) $ (.18)
============ ============
Loss per share:
Basic........................................... $ (1.24) $ (2.08)
============ ============
Diluted ........................................ $ (1.24) $ (2.08)
============ ============
Weighted average shares outstanding:
Basic........................................... 10,077,321 9,253,598
============ ============
Diluted ........................................ 10,077,321 9,253,598
============ ============

See accompanying notes.

DAILEY INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,
1999 1998
---------- ----------

OPERATING ACTIVITIES:
Net loss ...................................... $ (12,536) $ (19,284)
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary loss on repurchase of notes.... -- 17,579
Depreciation and amortization ............... 6,410 4,628
Deferred income taxes ....................... (6) 173
Amortization of debt issuance costs ......... 216 --
Provision for doubtful accounts ............. (47) 220
Provision for stock awards .................. 625 185
Equity income of unconsolidated subsidiary... (509) --
Changes in operating assets and liabilities
(net of the effects of acquisitions):
Accounts receivable trade ................... 147 (4,812)
Accounts receivable from/payable to
officers and affiliates .................. (137) (112)
Prepaid expenses and other .................. 1,560 (4,233)
Accounts payable and accrued liabilities .... (9,014) 3,749
Income taxes payable ........................ 693 821
---------- ----------
Net cash used in operating activities ......... (12,598) (1,086)

INVESTING ACTIVITIES:
Additions to revenue-producing tools and
inventory ................................... (3,207) (17,056)
Inventory transferred to cost of rentals ...... 1,334 2,317
Revenue-producing tools lost in hole,
abandoned and sold .......................... 1,291 645
Additions to property and equipment ........... (671) (1,824)
Proceeds from sale of property and equipment .. 458 1,293
Acquisitions .................................. -- (76,903)
Unrealized loss on cash equivalent
investments............................... (59) --
---------- ----------
Net cash used in investing activities ......... (854) (91,528)

FINANCING ACTIVITIES:
Proceeds from the issuance of debt ............ -- 268,125
Payments on outstanding debt .................. (355) (120,874)
Extraordinary loss on repurchase of notes...... -- (12,650)
Purchase of treasury stock..................... (13) --
---------- ----------
Net cash provided by (used in) financing
activities .................................. (368) 134,601
---------- ----------
Effect of foreign exchange rate changes
on cash ..................................... 162 (92)
---------- ----------

Increase (decrease) in cash and cash
equivalents ................................. (13,658) 41,895
Cash and cash equivalents at beginning of
period ...................................... 32,843 59,836
---------- ----------
Cash and cash equivalents at end of period .... $ 19,185 $ 101,731
========== ==========

See accompanying notes.

DAILEY INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)

1. SUBSEQUENT EVENTS AND GOING CONCERN

In response to adverse industry conditions, the Company began during the
third quarter of 1998 to review and implement cost saving strategies to reduce
its cost structure to bring it more in line with then current industry
conditions, including consolidating or eliminating operations and reducing
overhead. As a result of these efforts, the Company recorded a reorganization
charge during 1998 of $3.4 million and $1.2 million in 1999 (see Note 5). The
Company has continued to review methods in which it can reduce its cost
structure and reduce overhead.

In April 1999, the Company retained an investment banking firm as financial
advisor to advise the Company on its strategic and financial alternatives,
including sales and divestitures of assets, a capital infusion, or a sale of the
Company.

The Company currently has no outstanding debt other than under the Senior
Notes (see Note 7) and debt assumed in the IDS acquisition (see Note 4).
However, the Company currently does not have any commitment from any third party
to lend the Company additional funds and no assurance can be given that such a
financing transaction can be completed on terms acceptable to the Company or at
all. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classifications of liabilities that may result from the outcome
of this uncertainty.

On May 21, 1999, the Company announced that it and certain of its
subsidiaries had entered into an agreement to be acquired by Weatherford
International, Inc.("Weatherford"), a Houston-based oilfield products and
services company. The terms of the acquisition contemplate the issuance of
shares of Weatherford common stock having a market value of $195 million. The
terms of the acquisition are set forth in an acquisition agreement between the
Company and Weatherford dated May 21, 1999. Under the agreement, the Company's
outstanding $275 million Senior Notes indebtedness would be exchanged pro rata
for $185 million in Weatherford stock. All outstanding equity securities held by
the Company's equity security holders would be exchanged for $10 million in
Weatherford stock that would be shared pro rata based on share ownership. The
value of the Weatherford common stock would be fixed as of the date of the
consummation of the acquisition, and will be based on an average closing sales
price calculation over a 10 trading-day period preceding the date of
consummation. The acquisition agreement contemplates the filing by Dailey and
eight of its domestic subsidiaries in the United States Bankruptcy Court for the
District of Delaware of petitions for relief under Chapter 11 of the Bankruptcy
Code, along with a plan of reorganization and a disclosure statement, in order
to implement a financial restructuring. The closing of the acquisition is
subject to a number of conditions, including bankruptcy court approvals and
requisite regulatory approvals. The Company expects to file the petitions in
bankruptcy along with the plan of reorganization and disclosure statement by
June 1, 1999. The agreement provides that the plan of reorganization will
contemplate the payment of all trade creditors' claims as and when they come due
in the ordinary course of business or in full on the effective date of the plan.

In May 1999, the Company implemented an incentive plan to retain certain key
personnel through December 31, 1999. The cost of the incentive plan is
approximately $800,000.

On May 24, 1999, Mr. Al Kite resigned as interim Chief Executive Officer
and as a director of the Company.

The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's recent losses from operations and the acquisition agreement and
proposed bankruptcy filing raise substantial doubt about its ability to continue
as a going concern. The appropriateness of using the going concern basis is
dependent upon, among other things, (i) confirmation of the plan of
reorganization by the bankruptcy court, and (ii) consummation of the
transactions contemplated by the acquisition agreement with Weatherford.

The plan of reorganization could materially change the amounts currently
recorded in the financial statements. The financial statements do not give
effect to any adjustment to the carrying value of assets, or amounts and
classifications of liabilities that might be necessary as a consequence of this
matter.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements include the
accounts of Dailey International Inc. and its subsidiaries ("Dailey" or the
"Company") and have been prepared in accordance with United States generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and such adjustments are of a normal, recurring nature. Operating
results for the three months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999. For
further information, reference is made to the consolidated financial statements
and footnotes thereto included in the Company's Form 10-K filed with the
Securities and Exchange Commission on April 1, 1999.

As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS No.
130 established new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no immediate
impact on the Company's net loss or stockholders' equity. SFAS No. 130 requires
the Company's foreign currency translation adjustments and unrealized gains/loss
on investments to be included in comprehensive income. For the three months
ended March 31, 1999 and 1998, the total comprehensive loss was $12,579,000 and
$19,377,000, respectively.

Certain reclassifications have been made to the March 31,1998 financial
statements to conform to the 1999 presentation.

3. ORGANIZATION

The accompanying consolidated financial statements reflect the operations of
Dailey International Inc. (formerly Dailey Petroleum Services Corp.), a Delaware
corporation, hereinafter referred to as the "Company" or "Dailey."

The Company currently manages its operations in two business segments: (1)
downhole products and services and (2) underbalanced drilling services. Downhole
products and services are comprised of the Company's directional drilling
services, electric wireline services, tubing conveyed perforating services and
downhole tool rentals. The Company's underbalanced drilling services were
acquired through the Company's acquisition of Air Drilling International, Inc.
("ADI") in June 1997. Founded in 1945 as a rental tool company, Dailey began
offering directional drilling services in 1984 and currently provides such
services in the Gulf of Mexico, the United States Gulf Coast region, and most
recently, Venezuela, Louisiana and the Austin Chalk formation in Texas. In June
1997, the Company acquired ADI and, as a result, became a leading provider
worldwide of air drilling services for underbalanced drilling applications. In
January 1998, the Company acquired the operating assets and liabilities of
Directional Wireline Services, Inc. ("DWS"), DAMCO Tong Services, Inc. and DAMCO
Services, Inc. (collectively, "DAMCO", and with DWS, "DWS/DAMCO"), which are
headquartered in Houma, Louisiana. DWS/DAMCO provides specialized drilling,
workover, completion and production services to the Gulf of Mexico and Nigerian
markets. In March 1998, the Company acquired Integrated Drilling Systems,
Limited ("IDS"), which is headquartered in Aberdeen, Scotland. IDS manufactures
directional drilling tools. In August 1998, the Company acquired substantially
all of the assets of the directional drilling business of Transocean Petroleum
Technology Limited ("Transocean") located in Aberdeen, Scotland. In December
1998 Dailey, through its subsidiary Air Drilling Services, Inc., acquired 51% of
International Nitrogen Services, Inc. ("INS"), a joint venture with MG Generon,
Inc. The company, headquartered in Houston, Texas, provides non-cryogenic
nitrogen generators and production units for use in the on-site production of
nitrogen for injection in downhole drilling of oil and gas.

4. ACQUISITIONS

DWS/DAMCO Acquisition: In January 1998, the Company acquired the operating
assets and liabilities of DWS/DAMCO. The aggregate purchase price for DWS/DAMCO
was $61 million financed with proceeds from a $115 million 9 3/4% senior notes
offering in August 1997 and borrowings under the Company's revolving credit
facility. The acquisition was accounted for under the purchase method of
accounting; accordingly the assets and liabilities of DWS/DAMCO were recorded at
their estimated fair market values as of the date of acquisition. The Company
recorded goodwill of approximately $32.5 million relating to the excess of the
purchase price over the fair market value of the assets, which was to be
amortized over 25 years and result in approximately $1.2 million in amortization
expense per year. Based on the Company's review of long-lived assets, including
goodwill, the remaining unamortized goodwill balance of $31.3 million at
December 31, 1998 was deemed to be fully impaired.

IDS Acquisition: The Company acquired the outstanding capital stock of IDS
in March 1998 (with additional consideration paid in July 1998 in connection
with the resolution of certain contingencies) for approximately $18.8 million in
cash and 1,064,000 shares of Class A Common Stock (309,516 shares were returned
in July 1998), plus assumption of debt of approximately $6.5 million. The IDS
Acquisition was accounted for under the purchase method of accounting. The
assets and liabilities of IDS were recorded at their estimated fair market
values as of the date of acquisition. The Company recorded approximately $20.3
million in goodwill, representing the excess of the purchase price over the
estimated fair market value of the IDS assets, which was to be amortized over 25
years and result in additional annual amortization expense of $788,000. Based on
the Company's review of long-lived assets, including goodwill, the remaining
unamortized goodwill of $19.7 million at December 31, 1998 was deemed to be
fully impaired.

Transocean Acquisition: In August 1998, the Company acquired substantially
all of the assets of the directional drilling business of Transocean located in
Aberdeen, Scotland for $10 million in cash. The Company assumed certain
Transocean directional contracts and operations in the North Sea and Europe. The
Transocean Acquisition was accounted for under the purchase method of
accounting. The assets and liabilities were recorded at their estimated fair
market value as of the date of the acquisition. The Company recorded goodwill of
$1.2 million relating to the excess of purchase price over the fair market value
of the assets, which will be amortized over 25 years and result in approximately
$48,000 in amortization expense per year. The purchase price allocation was
based on preliminary estimates and may be revised at a later date.

INS Acquisition: In December 1998, the Company acquired 51% of INS for
approximately $7.1 million cash, subject to a purchase price adjustment of up to
$500,000 based on future earnings. INS, a joint venture with MG Generon,
provides non-cryogenic nitrogen generators and production units for use in the
on-site production of nitrogen for injection in downhole drilling of oil and gas
wells. The joint venture is accounted for using the equity method of accounting.

5. REORGANIZATION COST

Reorganization costs of $1.2 million incurred in 1999 were primarily
related to the resignation of the former chief financial officer and other
employees, and the accelerated vesting of restricted stock awards of $570,000
based on the October 1997 price of $12.75 per share.

6. REVENUE-PRODUCING TOOLS AND INVENTORY

MARCH 31, DECEMBER 31,
1999 1998
--------- --------
(IN THOUSANDS)

Revenue-producing tools..................... $ 161,530 $159,993
Accumulated depreciation.................... (58,196) (53,325)
--------- --------
103,334 106,668
Inventory:
Components, subassemblies and expendable
parts.................................. 29,333 30,711
Rental tools and expendable parts under
production............................. 2,088 2,247
Raw materials............................. 1,900 1,898
--------- --------
33,321 34,856
--------- --------
Revenue-Producing Tools and
Inventory...................... $ 136,655 $141,524
========= ========

7. BORROWING ARRANGEMENTS AND EXTRAORDINARY ITEM

Long-term debt consisted of the following:

MARCH 31, DECEMBER 31,
1999 1998
--------- --------
(IN THOUSANDS)

9 1/2% Senior Notes............... $ 275,000 $275,000
Loans payable to a bank........... 796 1,102
Other............................. 7 6
--------- --------
275,803 276,108
Less current portion of long-term
debt........................... (736) (1,048)
--------- --------
Total long-term debt.... $ 275,067 $275,060
========= ========

On February 13, 1998, the Company issued $275 million of 9 1/2% Senior Notes
due 2008 (the "Senior Notes"). Of the $268.1 million net proceeds to the
Company, approximately $127.7 million were utilized to repurchase at a premium
of 111% of their principal amount all of the outstanding principal amount of the
Company's 9 3/4% Senior Notes (the "Old Notes") and approximately $7.5 million
were utilized to repay outstanding debt under the Company's revolving credit
facility. As a result of the repurchase of the Old Notes, the Company recorded
an extraordinary loss of approximately $17.6 million, or $1.79 per diluted
share, with no related income tax benefit, representing the excess of the
purchase price for the Old Notes over their carrying value on the date of
repurchase. The Senior Notes are unsecured senior obligations of the Company.
The Senior Notes are redeemable at the option of the Company on or after
February 15, 2003 at stipulated redemption prices.

8. INCOME TAXES

Income tax expense exceeded the amount that would have resulted from
applying the U.S. federal statutory tax rate due to foreign income taxes and
withholding taxes with no offsetting benefit from U.S. net operating losses, net
of valuation allowances.

9
9. REPORTABLE SEGMENTS

The Company has two reportable segments: Downhole Products and Services and
Underbalanced Drilling. The Downhole Products and Services segment primarily
provides downhole tools for rental, directional drilling services, electric
wireline and tubing conveyed perforating services and tubular testing and
handling services. The Underbalanced Drilling segment provides air drilling
services and underbalanced drilling equipment packages.

THREE MONTHS ENDED MARCH 31,
1999 1998
---------- ----------
(IN THOUSANDS)

Revenues:

Downhole Products & Services
Rental Revenue ........................ $ 9,736 $ 15,691
Products & Services ................... 9,628 9,988
---------- ----------
Total ............................. 19,364 25,679

Underbalanced Drilling
Products & Services .................... 1,365 1,761
Underbalanced Drilling ................. 7,610 10,580
---------- ----------
Total ............................. 8,975 12,341
---------- ----------
Total Reportable Segment Revenue ............ $ 28,339 $ 38,020
========== ==========

Operating Income (Loss):

Downhole Products & Services ................ $ (4,683) $ 1,939
Underbalanced Drilling ...................... 2,845 4,449
---------- ----------
Total Reportable Segment
Operating Income (Loss) ................... $ (1,838) $ 6,388
========== ==========

A RECONCILIATION OF OPERATING INCOME (LOSS) FROM SEGMENTS TO CONSOLIDATED
TOTAL OPERATING LOSS IS AS FOLLOWS:

THREE MONTHS ENDED MARCH 31,
1999 1998
---------- ----------
(IN THOUSANDS)

Operating Income (Loss)
Total Operating Income (Loss) for
Reportable Segments ....................... $ (1,838) $ 6,388
Non-Operating Segments
Selling, General and Administrative ....... 2,401 2,882
Depreciation & Amortization ............... 243 203
Reorganization Costs ...................... 1,075 --
Non-Cash Compensation Expense ............. 55 185
Interest Expense .......................... 6,862 4,200
Other Income ................................ (1,019) (837)
---------- ----------
Consolidated Loss Before
Taxes and Extraordinary Item ........ $ (11,455) $ (245)
========== ==========

SEGMENT ASSETS:
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
(IN THOUSANDS)

Downhole Products & Services ................ $ 194,631 $ 143,084
Underbalanced Drilling ...................... 32,513 79,578
---------- ----------
Total Assets for Reportable Segments ........ 227,144 222,662
Non-Operating Segment Assets ................ 23,892 49,511
---------- ----------

Consolidated Assets ......................... $ 251,036 $ 272,173
========== ==========

Non-operating segment assets primarily consist of cash and cash equivalents,
corporate property and equipment and certain deferred costs.

DAILEY INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RECENT DEVELOPMENTS

On May 21, 1999, the Company announced that it and certain of its
subsidiaries had entered into an acquisition agreement with Weatherford
International, Inc. See "-Proposed Acquisition" below.

FORWARD-LOOKING INFORMATION

From time to time, the Company and its representatives may make certain
statements that contain "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) and that involve risk and uncertainty.
Words such as "anticipate", "expect", "estimate", "project" and similar
expressions are intended to identify such forward-looking statements. These
forward-looking statements may include, but are not limited to, future cash
needs and cash flows and capital expenditure plans and information systems
plans, including plans and expectations relating to the year 2000 computer
software issue, anticipated results from current and future operations,
earnings, margins, acquisitions, market trends in the oilfield services
industry, including demand for the Company's drilling services and downhole
tools, competition and various business trends. Forward-looking statements may
be made by management orally or in writing including, but not limited to, the
Managements' Discussion and Analysis of Financial Condition and Results of
Operations section and other sections of the Company's filings with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Securities Exchange Act of 1934.

Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Such forward-looking statements
are subject to certain risks, uncertainties and assumptions, including without
limitation those identified in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998. Should one or more of these
risks or uncertainties materialize, or should any of the underlying assumptions
prove incorrect, actual results of current and future operations may vary
materially from those anticipated, estimated or projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates.

Among the factors that may have a direct bearing on the Company's results of
operations and the oilfield services industry in which it operates are the
Company's success or failure in implementing its business and operational
strategies while subject to reorganization proceedings; the ability of the
Company to conclude a judicially - approved restructuring of its obligations
with its creditors on the terms described in this Form 10-Q; the Company's
substantial leverage, including risks that available cash and cashflow from
operations will be insufficient to cover future obligations; the ability of the
Company to borrow additional funds to finance capital expenditures and other
necessary operating expenses; changes in the price of oil and natural gas and
the related effects thereof on demand for the Company's services; the impact of
competitive products and pricing; the presence of competitors with greater
financial resources; product demand and acceptance risks, including product
obsolescence risks with respect to its downhole tools and directional drilling
technology; risks associated with acquisitions, including failure to
successfully manage the Company's growth and integrate the operations acquired
in such acquisitions; the inability of the Company to decrease certain costs due
to unfavorable terms in employment agreements, leases, supply contracts,
licenses and other agreements entered into by the Company; risks that the
Company or its third party vendors and customers will not be Year 2000 compliant
in a timely manner; typical operating risks inherent in the oilfield services
industry, including risks of environmental liability; delays in receiving raw
materials utilized in the manufacture and assembly of the Company's downhole
tools and other difficulties in the manufacture, assembly or delivery of the
Company's downhole tools, including those acquired in the Company's recent
acquisitions; worldwide political stability and economic growth and other risks
associated with international operations, including foreign exchange and other
currency risks; and the Company's successful execution of internal operating
plans, as well as regulatory uncertainties and legal proceedings.

DETERIORATING OPERATING RESULTS AND FINANCIAL CONDITION

During 1998, the Company's results of operations and financial condition
deteriorated significantly over prior year levels. This trend continued during
the first quarter of 1999. This deterioration is a result of a combination of
factors, including adverse industry conditions, failure to successfully
integrate and realize anticipated benefits from acquired companies and the
significant debt burden incurred by the Company in 1997 and 1998 in order to
finance its acquisition strategy. The following chart sets forth financial data
for the Company as of and for the three month periods ending on March 31, 1999
and 1998 and the twelve month periods ending December 31, 1998 and 1997.

AS OF AND FOR THE THREE AS OF AND FOR THE TWELVE
MONTHS ENDED MONTHS ENDED
------------------------------------- -------------------------------------
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31,
1999 (1) 1998 (1) 1998 1997 (1)
------------- ------------------ ------------------ -----------------

Revenues......................... $ 28,339 $ 38,020 $ 132,317 $ 97,385
Earnings (loss) per share........ (1.24) (2.08) (11.46) 0.10
Cash flow from operations........ (12,598) (1,086) (9,487) 14,732
Working capital.................. 34,219 118,039 40,696 70,357
Total long-term debt............. 275,067 276,024 275,060 114,229
Stockholders equity (deficit).... (52,152) 55,704 (40,185) 65,401

(1) Amounts are derived from unaudited financial information.

- ----------

Industry Conditions. Demand for the Company's products and services depends
to a large extent upon the level of exploration and production activity in the
oil and gas industry and the industry's willingness to spend capital on drilling
operations, which in turn depends in part on oil and gas prices, expectations
about future prices, the cost of exploring for, producing and delivering oil and
gas, the discovery rate of new oil and gas reserves, domestic and international
political, military, regulatory and economic conditions and the ability of oil
and gas companies to raise capital. Prices for oil and gas historically have
been extremely volatile and have reacted to changes in the supply of and demand
for oil and natural gas, domestic and worldwide economic conditions and
political instability in oil producing countries. During 1996 and much of 1997,
the oil field service industry experienced a general improvement in product
demand and pricing as relatively stable and improved oil and natural gas prices
combined with a strong world economy to increase exploration and development
activity worldwide. This trend benefited the Company and its results during 1996
and 1997.

Beginning in late 1997, the worldwide price of oil began to decline
significantly and prices for natural gas weakened. As prices for oil continued
to decline throughout 1998, oil and gas companies began to curtail drilling and
reduce spending on exploration and development activities, which significantly
negatively impacted the Company's results of operations during 1998. As a
result, the Company's revenues and operations during 1998 and the first quarter
of 1999 declined significantly from the comparable periods in 1997 and 1998,
respectively. Operations during 1998 also were adversely affected by work
stoppages in the Gulf of Mexico for the Company's products and services as a
result of adverse weather conditions. The Company views the worldwide rig count,
and in particular, the rig count in the United States, as a general barometer of
demand for a substantial portion of the Company's products and services. The
following chart summarizes the estimated U.S. rig count and international rig
count at various points over the past 15 months, as reported by Baker Hughes,
Inc.

MARCH DECEMBER SEPTEMBER JUNE MARCH DECEMBER DECEMBER
1999 1998 1998 1998 1998 1997 1996
-------------- -------------- -------------- -------------- -------------- -------------- --------------

U. S. Rig Count....... 526 621 754 823 890 1,003 851
International
Rig Count............. 613 671 724 790 806 819 810

Although oil and gas prices have generally increased since December 1998,
demand for the Company's services in its principal areas of operations has not
improved to levels required to produce the levels of revenues and cash flows
necessary in order for the Company to meet its substantial debt obligations.

Acquisitions and Substantial Indebtedness. Beginning in late 1996, the
Company implemented a growth strategy aimed at completing strategic and
complementary acquisitions that would expand the products and services the
Company offered to the oil and gas industry. As a result of this strategy, the
Company completed various acquisitions during 1997 and 1998, the most
significant of which are summarized in the table set forth below:

ACQUISITION DATE CONSIDERATION PAID METHOD OF FINANCING
------------- ---- ------------------ -------------------

International Nitrogen December 1998 $7.1 million cash, plus adjustment Proceeds from senior notes
Services, LLC ("INS") based on future earnings

Assets of Transocean August 1998 $10.0 million cash Proceeds from senior notes
Petroleum Technology
Limited ("Transocean")

Integrated Drilling Services March 1998 $18.8 million cash, including Proceeds from senior notes
Limited ("IDS") assumption/repayment of debt of $6.5
million, and 755,084 shares of Class
A Common Stock

Directional Wireline January 1998 $61 million cash Proceeds from senior notes,
Services, Inc., DAMCO borrowings under credit facility
Services, Inc. and (refinanced by senior notes)
DAMCO Tong Services, Inc.,
("DWS/DAMCO")

Air Drilling International June 1997 $46.4 million, including repayment of Borrowings under credit facility
("ADI") $16.8 million of indebtedness (refinanced by senior notes)

The Company financed these acquisitions primarily through borrowings under
then-existing credit facilities and issuances of debt securities. In this
regard, in August 1997, the Company issued $115 million principal amount of its
9 3/4 % Senior Notes due 2007 (the "Old Notes"), from which the Company realized
net proceeds of approximately $109.6 million. These net proceeds were utilized
to repay outstanding borrowings under the Company's credit facility incurred to
finance the Company's acquisition of ADI in June 1997, to finance capital
expenditures of $24.8 million for the eight months ended December 31, 1997 and
to finance a portion of the DWS/DAMCO Acquisition consummated in January 1998.
On February 13, 1998, the Company issued $275 million principal amount of its 9
1/2% Senior Notes due 2008 (the "Senior Notes"). Of the $268.1 million net
proceeds to the Company from the sale of the Senior Notes, approximately $127.7
million were utilized to repurchase at a premium of 111% of their principal
amount all of the outstanding principal amount of the Old Notes, approximately
$7.5 million was utilized to repay outstanding debt under the Company's credit
facility incurred to finance a portion of the purchase price for the DWS/DAMCO
Acquisition, and a portion was utilized to fund the cash portion of the purchase
price for the IDS, Transocean and INS acquisitions. The remaining net proceeds
from the sale of the Senior Notes were utilized to fund capital expenditures of
$49.7 million for the year ended December 31, 1998 and for general and working
capital purposes. The Senior Notes require annualized interest payments of
approximately $26.1 million per year. As a result of the repurchase of the Old
Notes, the Company recorded an extraordinary loss in the first quarter of 1998
of approximately $17.6 million representing the excess of the purchase price for
the Old Notes over their carrying value on the date of repurchase.

These transactions significantly increased the Company's debt over
historical levels. The Company's increased level of indebtedness had several
important effects on the Company's operations, including (i) a substantial
portion of the Company's cash flows from operations being dedicated to the
payment of interest and principal on its indebtedness, (ii) the Company's
leveraged position substantially increased its vulnerability to adverse changes
in general economic and industry conditions (including current industry
conditions), as well as to competitive pressure, and (iii) the Company's ability
to obtain additional financing for working capital, capital expenditures and
general corporate and other purposes became constrained.

Going Concern. In response to these adverse industry conditions, the Company
began during the third quarter of 1998 to review and implement cost saving
strategies to reduce its cost structure to bring it more in line with then
current industry conditions, including consolidating or eliminating operations
and reducing overhead. As a result of these efforts, the Company recorded a
reorganization charge during 1998 of $3.4 million and $1.2 million in the first
quarter of 1999. The Company has continued to review methods in which it can
reduce its cost structure and reduce overhead.

Based upon the Company's significant operating losses and negative operating
cash flows in recent periods and a deficiency in stockholders' equity at
December 31, 1998, the Company's independent auditors issued their audit opinion
on the Company's December 31, 1998 financial statements with a "going concern"
qualification, indicating their concern that these conditions raise substantial
doubt about the Company's ability to continue as a going concern.

PROPOSED ACQUISITION

On May 21, 1999, the Company announced that it and certain of its
subsidiaries had entered into an agreement to be acquired by Weatherford
International, Inc. (Weatherford"), a Houston-based oilfield products and
services company. The terms of the acquisition contemplate the issuance of
shares of Weatherford common stock having a market value of $195 million. The
terms of the acquisition are set forth in an acquisition agreement between the
Company and Weatherford which was signed on May 21, 1999. Under the agreement,
the Company's outstanding $275 million Senior Notes indebtedness would be
exchanged pro rata for $185 million in Weatherford stock. All outstanding equity
securities held by the Company's equity security holders would be exchanged for
$10 million in Weatherford stock that would be shared pro rata based on share
ownership. The value of the Weatherford common stock would be fixed as of the
date of the consummation of the acquisition, and will be based on an average
closing sales price calculation over a 10 trading-day period preceding the date
of consummation. The acquisition agreement contemplates the filing by the
Company and eight of its domestic subsidiaries in the United States Bankruptcy
Court for the District of Delaware of petitions for relief under Chapter 11 of
the Bankruptcy Code, along with a plan of reorganization and a disclosure
statement, in order to implement the financial restructuring. The closing of the
acquisition is subject to a number of conditions, including bankruptcy court
approvals and requisite regulatory approvals. The petitions in bankruptcy along
with the plan of reorganization and disclosure statement are expected to be
filed by June 1, 1999. The proposed plan has been agreed to by holders of
approximately $225 million (82%) of the outstanding principal amount of the
Company's Senior Notes and more than 50% of the Company's Common Stock. The
agreement provides that the plan of reorganization will contemplate the payment
of all trade creditors' claims as and when they come due in the ordinary course
of business or in full on the effective date or the plan. See Part II. Item 5 -
"Other Information" of this Form 10-Q.

RESIGNATION OF OFFICERS AND OUTSIDE DIRECTORS

In August, 1998, James F. Farr resigned as CEO of the Company. Mr. Farr was
later replaced by Mr. Al Kite as interim CEO. In May 1999, Mr. Kite resigned as
interim CEO and from all other positions with the Company. As a result of Mr.
Farr's resignation, the Company incurred a severance charge of approximately
$1.8 million that was included with restructuring charges in the Company's
financial statements. On January 27, 1999, David Tighe resigned as CFO and as a
Director and the Company recorded a severance charge of approximately $1.0
million during the first quarter of 1999 relating to Mr. Tighe's resignation,
including $570,000 related to the accelerated vesting of stock awards valued at
the October 6, 1997 price of $12.75 per share. In February 1999, each of the
Company's outside Directors resigned from the Board of Directors. Currently, the
Company's Board of Directors consists of Mr. J.D. Lawrence and Mr. William D.
Sutton, each of which is an employee of the Company. The Company has not yet
identified any individuals to replace the current vacancies on the Company's
Board of Directors.

DELISTING OF SECURITIES

The Nasdaq National Market rules, which govern the listing of securities
such as the Company's Class A Common Stock on the Nasdaq National Market System
("Nasdaq NMS"), require that the Company maintain a minimum bid price of $5.00
per share on its Class A Common Stock and a minimum market value for the Class A
Common Stock's public float (i.e., securities not owned by officers, directors
or 10% stockholders) of $15 million. As a result of the deterioration of the
market value of the Company's Class A Common Stock, the Company no longer meets
the Nasdaq NMS' standards with respect to minimum bid price or public float
market value. The Company's Class A Common Stock began trading on the NASD OTC
Bulletin Board on February 9, 1999.

RESULTS OF OPERATIONS

The Company derives rental income from its fleet of downhole tools and, to a
lesser extent, from downhole tools owned by third parties. The Company typically
charges its customers a daily rental rate for downhole tools, except for its
downhole drilling motors, which are rented at an hourly rate. In international
markets, the Company also often charges its customers a refurbishment charge,
which is included in rental income.

Revenues from sales of products and services consist of directional drilling
services, lost-in-hole charges and sales of its mechanical drilling jars and, to
a lesser extent, from pipeline testing operations acquired in the ADI
Acquisition. Although pipeline testing operations are managed as part of the
Company's underbalanced drilling segment, the Company does not believe their
inclusion with operations of the Company's downhole products and services
segment is material to the reporting of such segments due to the insignificant
nature of these pipeline testing operations. Revenues from the acquired
DWS/DAMCO operations also are reflected in sales of products and services.
Revenues from services of the Company's directional drillers and MWD technicians
are generally billed on a per person/per day basis for the time on assignment at
the customer's drill site. Although the Company considers rentals of its
downhole drilling motors and MWD equipment to be a significant part of its
directional drilling services, revenues from such rentals are currently recorded
as rental income for

financial statement purposes. The Company's lost-in-hole revenues consist of
replacement charges that its customers pay each time a downhole tool is
lost-in-hole. The Company sells mechanical drilling jars in a limited number of
international markets, primarily to state-owned oil and gas companies.

The Company derives underbalanced revenues from rentals of air drilling
equipment used for underbalanced drilling applications, including compressors,
boosters, mist pumps and related equipment, which are typically rented at an
hourly or daily rate. The Company also derives underbalanced revenues by
providing specially-trained personnel, who are typically billed out on a per
person/per day basis, to operate its air drilling equipment.

The operating costs associated with the Company's rentals consist primarily
of expenses associated with depreciation, transportation, maintenance and repair
and related direct overhead. The costs associated with the Company's sales of
products and services consist primarily of the undepreciated portion of the
capitalized cost of its downhole tools sold or lost-in-hole and the salaries and
related costs associated with the Company's directional drillers and MWD
technicians and, to a lesser extent, costs associated with its pipeline testing
operations. The costs associated with the Company's underbalanced drilling
services consist of costs of third party rentals, repair and maintenance costs
and personnel costs.

THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1998

Rental Income. Rental income for the three months ended March 31, 1999 was
$9.7 million, a decrease of 38% from $15.7 million for the same period last
year. Exclusive of revenues from IDS, which was acquired in March 1998, and
Transocean, which was acquired in August 1998, of $826,000, rental revenues
decreased $6.8 million from the same period last year. Domestic rental income
decreased $4.9 million. Rental income from domestic directional drilling
activities decreased $3.3 million and rental income from downhole tools
decreased $1.6 million as the result of decreased demand caused by adverse
industry conditions. Internationally, rental income decreased $1.9 million. This
was the result of decreased directional drilling revenues of $212,000 primarily
in Venezuela due to adverse market conditions in this region resulting in the
curtailment by the Company of directional drilling activity in that area and a
decrease in rental income from downhole tools of $1.7 million as a result of
decreased demand due to adverse industry conditions.

Sales of Products and Services. Sales of products and services for the three
months ended March 31, 1999 were $11.0 million compared to $11.7 million for the
same period last year. Excluding revenues of $671,000 associated with
Transocean, which was acquired in August 1998, revenues decreased $1.4 million
primarily due to decreased revenue from tools lost-in-hole of $1.2 million,
decreased pipeline service revenues of $396,000 and decreased sales of $425,000.
This was partially offset by increased revenues from directional drilling
operations of $199,000, and the expansion of directional drilling operations
into Thailand of $338,000.

Underbalanced Drilling Services Revenue. Underbalanced drilling services
revenue for the three months ended March 31, 1999 was $7.6 million compared to
$10.6 million for the same period last year. This decrease was primarily due to
decreased revenues in Canada of $1.2 million due to industry conditions,
Colombia of $1.1 million due to the loss of a significant customer, in Indonesia
of $691,000 due to the financial crisis in that country and in Venezuela of
$576,000 due to industry conditions. This was partially offset by increased
revenues in Bolivia of $500,000.

Cost of Rentals. Cost of rentals for the three months ended March 31, 1999
was $8.5 million, a decrease of 16% from $10.1 million for the same period last
year. Excluding costs associated with IDS, which was acquired in March 1998, and
Transocean, which was acquired in August 1998, of $794,000, costs decreased $2.4
million. Margins, exclusive of IDS and Transocean, decreased from 36% for the
three months ended March 31, 1998 to 14% for the three months ended March 31,
1999, primarily due to an increase in fixed costs associated with the expansion
of directional drilling operations in the U.S. mid-continent region and the
increased use of third party tools which typically generate lower margins as a
result of expansion into new applications for the Company's directional drilling
services.

Cost of Products and Services. Cost of products and services for the three
months ended March 31, 1999 was $5.7 million, which was a $702,000 decrease from
the same period last year. Excluding costs associated with Transocean, which was
acquired in August 1998, of $643,000, costs decreased $1.3 million. The margin
on sales of products and services for the three months ended March 31, 1999,
excluding the impact of acquisitions, increased to 51% from 46% for the same
three months last year.

15
Cost of Underbalanced Drilling Services. Cost of underbalanced drilling
services for the three months ended March 31, 1999 was $4.9 million compared to
$5.8 million for the same period last year. Margins on underbalanced drilling
services were 36% compared to 46% during the same period last year primarily as
the result of the loss of higher margin jobs in Colombia and Indonesia.

Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended March 31, 1999 were $7.5 million, compared
to $7.5 million for the same three months last year. Excluding costs of $1.9
million associated with DWS/DAMCO and IDS, costs decreased $1.9 million
primarily as a result of decreased personnel and compensation costs and
decreased office administration costs due to cost reduction actions implemented
during 1998.

Depreciation and Amortization. Depreciation and amortization expenses for
the three months ended March 31, 1999 were $6.4 million compared to $4.6 million
for the same three months last year. Depreciation and amortization expense
increased $1.8 million due primarily to increased depreciation and amortization
expense related to assets acquired in the acquisitions of DWS/DAMCO, IDS and
Transocean and to the addition of revenue producing tools at Dailey.

Reorganization Costs. Reorganization costs for the three months ended March
31, 1999 were $1.2 million compared to no costs for the same period last year.
These costs were primarily related to the resignation of the former chief
financial officer and other employees, and the accelerated vesting of restricted
stock awards of $570,000 based on the October 6, 1997 price of $12.75 per share.

Interest Expense. Interest expense for the three months ended March 31, 1999
was $6.9 million compared to $4.5 million for the same three months last year.
This increase was due to the interest on the Old Notes through mid-February 1998
and the Senior Notes from that date forward.

Income Tax Provision. Income tax expense for the three months ended March
31, 1999 was $1.1 million, a decrease from $1.5 million for the same three
months last year. Income tax expense exceeded the amount that would have
resulted from applying the U.S. federal statutory tax rate due to foreign income
taxes and withholding taxes with no offsetting benefit from U.S. net operating
losses, net of valuation allowances.

Extraordinary Item. As a result of the repurchase of the Old Notes, the
Company recorded an extraordinary loss in the first quarter of 1998 of
approximately $17.6 million, representing the excess of the purchase price for
the notes over the carrying value on the date of the repurchase.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital. Cash used in operating activities was $12.6 million during
the three months ended March 31, 1999. Principal uses of cash were to pay
interest on the Senior Notes of $13.1 million and fund capital expenditures of
$2.5 million. During the past several years, working capital requirements have
been funded through cash generated from operations, additional borrowings,
credit facilities, asset sales and proceeds from equity and debt offerings.

Senior Notes. The Senior Notes were issued pursuant to an indenture dated
February 13, 1998 (the "Indenture"). The Indenture contains various covenants
customary in such instruments, including covenants that (i) restrict the
Company's ability to incur additional indebtedness; (ii) restrict the Company's
ability to make restricted payments, including dividends; (iii) restrict the
Company's ability to sell assets; (iv) restrict the Company's ability to grant
liens on its assets; (v) limit transactions with affiliates and (vi) limit the
Company's ability to engage in certain extraordinary transactions, including
transactions involving a change in control of the Company or the sale of
substantially all of the Company's assets. The Senior Notes are guaranteed by
all of the Company's domestic subsidiaries, bear interest at 9 1/2% that is
payable semi-annually on February 15 and August 15 of each year, mature on
February 15, 2008 and are redeemable at the option of the Company for stipulated
redemption prices on or after February 15, 2003. The issuance of the Senior
Notes substantially increased the Company's level of indebtedness over
historical levels. The Company's increased level of indebtedness had several
important effects on the Company's operations, including (i) a substantial
portion of the Company's cash flows from operations being dedicated to the
payment of interest and principal on its indebtedness, (ii) the Company's
leveraged position substantially increased its vulnerability to adverse changes
in general economic and industry conditions (including current industry
conditions), as well as to competitive pressure, and (iii) the Company's ability
to obtain additional financing for working capital, capital expenditures and
general, corporate and other purposes became constrained.

Capital Expenditures. Capital expenditures of approximately $2.5 million
were made during the three months ended March 31, 1999. Of this amount, $1.9
million was primarily for MWD and other directional equipment and related
inventory. The Company currently has budgeted capital expenditures for the last
three quarters of 1999 of $4.0 million.

Funding of 1999 Operations. Following the filing of the petitions in the
Bankruptcy Court (see "-Proposed Acquisition" above), it is expected that the
Company's capital expenditures for the remainder of 1999 will be made subject to
prevailing industry conditions and in accordance with the rulings and procedure
set by the Bankruptcy Court. Actual amounts to be expended by the Company for
these activities will be dependent upon a number of factors, including
Bankruptcy Court approval, if necessary, the availability of capital spending
sources and the demand for the Company's products and services. The Company
currently expects that existing cash flows from operations will be sufficient to
fund planned capital expenditures for its operations for the remainder of 1999
(currently estimated to be $4 million). Subject to Bankruptcy Court approval,
the Company may seek additional capital from various lending sources to assist
the Company in funding its capital needs. There is no assurance, however, that
even if approved by the Bankruptcy Court, that the Company would be able to
access additional capital or that, if available, it will be on terms
advantageous to the Company. In addition, the Chapter 11 proceeding and
restrictions imposed by the Bankruptcy Court could limit the Company's
ability to access additional capital sources.

NEW ACCOUNTING PRONOUNCEMENTS

SFAS No. 133. In June 1998, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), Accounting for Derivative Instruments and Hedging Activities, which
establishes standards for the recognition and measurement of derivatives and
hedging activities. SFAS No. 133 requires all derivatives to be recorded on the
balance sheet at fair value and establishes "special accounting" for the
following three different types of hedges: hedges of changes in the fair value
of assets, liabilities, or firm commitments (referred to as fair value hedges);
hedges of the variable cash flows of forecasted transactions (cash flow hedges);
and hedges of foreign currency exposures of net investments in foreign
operations. Changes in fair value of derivatives that do not meet the criteria
of one of these three categories of hedges are included in income. SFAS No. 133
is effective for years beginning after June 15, 1999, at which time the Company
will adopt this provision. The Company does not expect SFAS No. 133 to have a
material effect on the Company's financial statements.

IMPACT OF YEAR 2000

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, those
computer programs have time sensitive software that recognizes a date using "00"
as the year 1900 rather than the year 2000. If not corrected, this could cause a
system failure or miscalculations causing disruptions of operations, including,
among other things, temporary inability to process transactions, send invoices
or engage in similar normal business activities.

The Company's plan to resolve the Year 2000 issue involves the following
four phases for both internal systems and operating equipment and third party
systems: assessment, remediation, testing and implementation. For internal
systems and operating equipment, the Company has reviewed all domestic systems
and hardware and is in the process of performing the same for international
systems and hardware and operating equipment. The Company has completed the
assessment and remediation phases and estimates that it has completed 80% of the
testing and implementation phases for internal systems and operating equipment.
For third party systems, the Company has mailed a survey to all customers and
vendors requesting evaluation of their Year 2000 issues and currently expects
receipt of responses by June, 1999. The Company will compile and analyze these
responses and establish appropriate action at that time.

The Company will utilize both internal and external resources to reprogram,
or replace, test, and implement software and operating equipment for Year 2000
modifications. The total cost of the Year 2000 project is estimated to be
$350,000 and is being funded using existing working capital. To date, the
Company has expensed approximately $50,000 related to all phases of the Year
2000 project. Of the total estimated remaining costs, approximately $250,000 is
attributable to the purchase of new software and operating equipment, which will
be capitalized. The remaining $50,000 relates to repair of hardware and software
and will be expensed as incurred.

The Company believes that it has an effective program in place to resolve
the Year 2000 issue. As noted above, the Company has not completed all phases of
the Year 2000 project. Although the Company currently expects to complete its
Year 2000 project prior to the millennium, in the event the Company does not
complete additional phases or if such phases are ineffective in addressing the
Year 2000 issue, the Company would still be able to perform international
directional drilling operations, process international financial ledgers, and
track inventory. However, disruptions in the economy generally resulting from
Year 2000 issues could also materially adversely affect the Company. In
addition, if the Company's third party vendors, suppliers or customers are not
Year 2000 compliant, the Company's operations could be adversely affected if
such third parties cannot supply goods and services required by the Company in a
timely manner, causing the Company to be unable to provide its goods and
services in a timely manner or at the Company's current standards of quality,
which could subject the Company to third party lawsuits and reduce demand for
the Company's goods and services. In addition, demand for the Company's goods
and services will be adversely affected if its customers operations are
adversely affected by the Year 2000 issue. The Company could be subject to
litigation for computer systems product failure, for example, equipment shutdown
or failure to properly date business records. The amount of potential liability
and lost revenue cannot be reasonably estimated at this time.

The Company has no contingency plans in the event it does not complete all
phases of the Year 2000 program. The Company plans to evaluate the status of
completion of its Year 2000 project in July 1999 and determine whether such
plans are necessary.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations. The tables below provide
information about the Company's financial instruments that are sensitive to
changes in interest rates.

For debt obligations, the tables below present expected cash flows and
related weighted-average interest rates expected by maturity dates. The fair
value of the Senior Notes is based on information provided by an investment bank
at year end. The fair value of the Company's long-term bank notes and other debt
are estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.

TWELVE MONTHS ENDING MARCH 31, FAIR
------------------------------------------------------------------------------- VALUE
2000 2001 2002 2003 THEREAFTER TOTAL 03/31/99
-------- ------------ ------------ ------------ ----------- ------------ ----------
(IN MILLIONS, EXCEPT INTEREST RATE PERCENTAGE)

Long Term Debt
Debt Service(a) $ 26.3 26.3 26.3 26.3 405.7 $ 510.9 $ 96.3

Average effective
interest rate 9.8% 9.8% 9.8% 9.8% 9.8% 9.8%

TWELVE MONTHS ENDING DECEMBER 31, FAIR
------------------------------------------------------------------------------- VALUE
1999 2000 2001 2002 THEREAFTER TOTAL 12/31/98
-------- ------------ ------------ ------------ ----------- ------------ ----------
(IN MILLIONS, EXCEPT INTEREST RATE PERCENTAGE)

Long Term Debt
Debt Service(a) $ 26.3 26.3 26.3 26.3 419.0 $ 524.2 $ 130.4

Average effective
interest rate 9.9% 9.9% 9.9% 9.9% 9.9% 9.9%

(a) Assumes scheduled maturities are funded with available resources.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not Applicable

ITEM 2. CHANGES IN SECURITIES

Not Applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The filing of the petitions for relief under Chapter 11 of the
Bankruptcy Code contemplated by the acquisition agreement between the
Company and Weatherford dated May 21, 1999, will constitute an event of
default under the terms of the Indenture governing the Senior Notes.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Proposed Acquisition".

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

Not Applicable

ITEM 5. OTHER INFORMATION

On May 21, 1999, the Company announced that it and certain of its
subsidiaries had entered into an acquisition agreement with
Weatherford. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Proposed Acquisition." For
additional information concerning this proposed acquisition, see the
Press Release issued by the Company on May 21, 1999, filed as Exhibit
99.1 to this Quarterly Report on Form 10-Q.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27.1 Financial Data Schedule

99.1 Press Release dated May 21, 1999 announcing the execution of
the Acquisition Agreement between Weatherford, the Company
and certain of its subsidiaries.

(b) Reports on Form 8-K. During the fiscal quarter for which this
Quarterly Report on Form 10-Q is being filed, the Company filed no
Current Reports on Form 8-K.

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.

DAILEY INTERNATIONAL INC.

By: /s/ JOHN BEARD
----------------------------------
John Beard
Interim Chief Financial Officer
(Principal Accounting Officer)

By: /s/ WILLIAM D. SUTTON
----------------------------------
Senior Vice President, General
Counsel and Secretary

INDEX TO EXHIBITS

Exhibit
Number Description
------- -----------

27 Financial Data Schedule

99.1 Press Release of the Company dated May
21, 1999.