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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

(MARK ONE)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [NO FEE REQUIRED]

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                          COMMISSION FILE NUMBER 1-8514

                            SMITH INTERNATIONAL, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S>                                                          <C>
                DELAWARE                                          95-3822631
     (STATE OR OTHER JURISDICTION OF                          (I.R.S.  EMPLOYER
     INCORPORATION OR ORGANIZATION)                          IDENTIFICATION NO.)
</TABLE>

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<S>                                                               <C>
411 NORTH SAM HOUSTON PARKWAY, SUITE 600                            77060
             HOUSTON, TEXAS                                       (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 443-3370

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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<S>                                  <C>
COMMON STOCK, $1.00 PAR VALUE               NEW YORK STOCK EXCHANGE, INC.
    (TITLE OF EACH CLASS)                       PACIFIC EXCHANGE, INC.
                                     (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
</TABLE>

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

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

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

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ].

     The aggregate market value of the voting stock held by non-affiliates on
June 30, 2004 was $5,751,836,149 (103,153,446 shares at the closing price on the
New York Stock Exchange of $55.76). On June 30, 2004, 104,780,238 shares of
common stock were outstanding. For this purpose all shares held by officers and
directors and their respective affiliates are considered to be held by
affiliates, but neither the Registrant nor such persons concede that they are
affiliates of the Registrant.

     There were 106,122,507 shares of common stock outstanding on March 8, 2005.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement related to the Registrant's 2005 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Form.

<PAGE>

                                TABLE OF CONTENTS

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<S>                                                                           <C>
                                     PART I

Item 1.  Business..........................................................    2
Item 2.  Properties........................................................   10
Item 3.  Legal Proceedings.................................................   10
Item 4.  Submission of Matters to a Vote of Security Holders...............   11

                                     PART II

Item 5.  Market for the Registrant's Common Equity, Related Stockholder
            Matters and Issuer Purchases of Equity Securities..............   11
Item 6.  Selected Financial Data...........................................   12
Item 7.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations......................................   13
Item 7A. Qualitative and Quantitative Market Risk Disclosures..............   25
Item 8.  Financial Statements and Supplementary Data.......................   26
Item 9.  Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure............................   55
Item 9A. Controls and Procedures...........................................   55
Item 9B. Other Information.................................................   55

                                    PART III

Item 10. Directors and Executive Officers of the Registrant................   55
Item 11. Executive Compensation............................................   55
Item 12. Security Ownership of Certain Beneficial Owners and Management....   55
Item 13. Certain Relationships and Related Transactions....................   55
Item 14. Principal Accountant Fees and Services............................   55

                                     PART IV

Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K....   56
</TABLE>

<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

          Smith International, Inc. ("Smith" or the "Company") is a leading
worldwide supplier of premium products and services to the oil and gas
exploration and production industry, the petrochemical industry and other
industrial markets. The Company provides a comprehensive line of
technologically-advanced products and engineering services, including drilling
and completion fluid systems, solids-control equipment, waste-management
services, production chemicals, three-cone and diamond drill bits, turbines,
fishing services, drilling tools, underreamers, casing exit and multilateral
systems, packers and liner hangers. The Company also offers supply-chain
management solutions through an extensive North American branch network
providing pipe, valves, fittings, mill, safety and other maintenance products.

          The Company was incorporated in the state of California in January
1937 and reincorporated under Delaware law in May 1983. The Company's executive
offices are headquartered at 411 North Sam Houston Parkway, Suite 600, Houston,
Texas 77060 and its telephone number is (281) 443-3370. The Company's annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Exchange Act of 1934 are made available free of charge on the
Company's Internet website at www.smith.com as soon as reasonably practicable
after the Company has electronically filed such material with, or furnished it
to, the Securities and Exchange Commission. The Company's Corporate Governance
Guidelines, Code of Business Conduct and Ethics and the charters of the Audit
Committee, Compensation and Benefits Committee and Nominating and Corporate
Governance Committee are also available on the Investor Relations section of the
Company's Internet website. Printed copies of these documents are available to
stockholders upon request.

          The Company's operations are aggregated into two reportable segments:
Oilfield Products and Services and Distribution. The Oilfield Products and
Services segment consists of: M-I SWACO, which provides drilling and completion
fluid systems and services, solids-control and separation equipment,
waste-management services and oilfield production chemicals; Smith Technologies,
which manufactures and sells three-cone drill bits, diamond drill bits and
turbine products; and Smith Services, which manufactures and markets products
and services used for drilling, workover, well completion and well re-entry
operations. The Distribution segment consists of one business unit, Wilson,
which markets pipe, valves and fittings as well as mill, safety and other
maintenance products to energy and industrial markets.

          Financial information regarding reportable segments and international
operations appears in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Note 16 of the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K. Information related
to business combinations appears in Note 4 of the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K.

BUSINESS OPERATIONS

Oilfield Products and Services Segment

M-I SWACO

          Fluid Products and Services. The Company is a leading worldwide
provider of drilling, reservoir drill-in and completion fluid systems, products
and engineering services to end users engaged in drilling oil and natural gas
wells. Drilling fluids are used to cool and lubricate the bit during drilling
operations, contain formation pressures, suspend and remove rock cuttings from
the hole and maintain the stability of the wellbore. Engineering services are
provided to ensure that the fluid products are applied effectively to optimize
drilling operations. These services include recommending products and services
during the well planning phase; monitoring drilling fluid properties;
recommending adjustments during the drilling phase; and analyzing/benchmarking
well results after completion of the project to improve the efficiencies of
future wells.

          M-I SWACO offers water-base, oil-base and synthetic-base drilling
fluid systems. Water-base drilling fluids are the world's most widely utilized
systems, having application in both land and offshore environments. Typically,
these systems comprise an engineered blend of weighting materials used to
contain formation pressures, and a broad range of chemical additives, designed
to yield the specific drilling performance characteristics required for a given
drilling project. Oil-base drilling fluids, which primarily are used to drill
water-sensitive shales, reduce torque and drag and are widely used in areas
where stuck


                                       2

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pipe is likely to occur. In certain drilling areas of the world, oil-base
systems exhibit comparably higher penetration rates when compared to water-base
systems, significantly reducing time on location and overall drilling costs.
Synthetic-base drilling fluids are used in drilling environments where oil-base
fluids are environmentally prohibited and provide the performance benefits of
oil-base systems. Synthetic-base systems are particularly advantageous in the
deepwater environment. M-I SWACO also provides a comprehensive line of reservoir
drill-in fluids which combine the high performance properties of a premium
drilling fluid with minimal damaging characteristics of a brine completion
fluid.

          Completion fluids (clear brines) are solids-free, clear-salt solutions
with high specific gravities and are non-damaging to the producing formation.
Operators use these specially designed fluid systems in combination with a
comprehensive range of specialty chemicals to control bottom-hole pressures,
while meeting the specific corrosion inhibition, viscosity and fluid loss
requirements necessary during the completion and workover phase of a well. These
systems are specially engineered to maximize well production by minimizing
formation damage that can be caused by solids-laden systems. M-I SWACO provides
a complete line of completion fluids products and services, including low- and
high-density brines, specialty chemicals, filtration and chemical treatment
services, wellsite engineering and technical and laboratory support services.

          Fluid Competition. The major competitors in the worldwide drilling
fluids market, which approximated $4.0 billion in 2004, are Halliburton Energy
Services (a division of Halliburton Company ("Halliburton")) and Baker Hughes
Drilling Fluids (a division of Baker Hughes, Inc. ("Baker Hughes")). While M-I
SWACO and these companies supply a majority of the market, the drilling fluids
industry is highly competitive, with a significant number of smaller, locally
based competitors. The major competitors in the worldwide completion fluids
market, which approximated $0.7 billion in 2004, are Baroid Completion Fluids (a
division of Halliburton), Tetra Technologies, Inc., BJ Services Company and
Ambar, Inc.

          Generally competition for sales of drilling and completions fluids is
based on a number of factors, including wellsite engineering services, product
quality and availability, technical support, service response and price.

          M-I SWACO Drilling Waste Management. M-I SWACO provides services,
equipment and engineering for solids control, pressure control and waste
management to the worldwide drilling market.

          Solids-control equipment is used to remove drill cuttings from the
fluid system, allowing the drilling fluid to be cleaned and recirculated. Solids
are normally separated from the drilling fluid using one or a combination of the
following: balanced elliptical and linear-motion shale shakers, desanders,
disilters, hydroclones, mud cleaners and centrifuges. M-I SWACO designs,
manufactures, sells and rents a comprehensive, proprietary line of this
equipment for oil and gas drilling processes throughout the world. The Company
is also a leading manufacturer and supplier of screens used in solids-control
equipment for both oilfield and certain industrial markets. M-I SWACO
complements its product offering by providing engineering and technical support
to operators and drilling contractors from the planning stages of their projects
through waste removal and site remediation.

           Operators employ M-I SWACO-manufactured pressure-control equipment
to drill in sour-gas and high-pressure zones. Well killing and high-pressure
control drilling chokes, together with related operating consoles, are used in
the drilling process during well kicks and well clean-up and testing operations.
Degassers and mud gas separators are designed to remove and vent entrained
gases, including toxic gases such as hydrogen sulfide and corrosive oxygen, from
the drilling mud. This equipment reduces the risk of dangerous and costly
blowouts caused by recirculating mud that contains natural gas. Key products in
M-I SWACO's pressure control product line include the MUD D-GASSER(R) and SUPER
CHOKE(TM), both of which hold strong market positions as do the SUPER MUD GAS
SEPARATOR(TM) and the SUPER AUTOCHOKE(TM).

          With drilling operations expanding into more environmentally sensitive
areas, there has been increased focus on the effective collection, treatment and
disposal of waste produced during the drilling of a well. M-I SWACO provides
operators with solutions designed to minimize and treat drilling waste. The
Company provides a suite of waste handling, minimization and management
products and services, including the CLEANCUT(R) pneumatic conveyance system for
collection and transportation of drill cuttings related to offshore drilling
programs. M-I SWACO also provides rig vacuum systems for cuttings recovery,
high-gravity force drying equipment for liquid/solid separation and cuttings
slurification and re-injection processes for reducing haul-off waste. In
addition, through the THERMAL PHASE SEPARATION(TM) process, M-I SWACO provides
operators a proven technology for maximizing the recovery of drilling fluids,
while minimizing wastes. M-I SWACO's waste treatment services encompass a wide
range of activities, including site assessment, drill cuttings injection, water
treatment, pit closure and


                                       3

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remediation, bioremediation, dewatering and thermal processing. The Company has
established ENVIROCENTERS(R) in Norway, Germany and the United States designed
specifically for recovering, treating and recycling solid and liquid drilling
wastes.

          M-I SWACO Drilling Waste Management Competition. M-I SWACO competes
with Brandt/Rigtech (a subsidiary of Varco International, Inc.) and Derrick/Oil
Tools. Additionally, there are a number of regional suppliers that provide a
limited range of equipment and services tailored for local markets. Competition
is based on product availability, equipment performance, technical support and
price.

          Oilfield Production Chemicals. M-I SWACO provides a line of oilfield
specialty chemicals and related technical services through its Oilfield
Production Chemical division, acquired in January 2003. Oilfield production
chemicals are used to enhance the flow of hydrocarbons from the wellbore by
eliminating paraffin, scale and other byproducts encountered during the
production process. Oilfield production chemicals are also used to protect
piping and other equipment associated with the production, transportation and
processing of oil and gas.

          Production Chemical Competition. The major competitors in the
worldwide oilfield production chemical market include Baker Petrolite (a
division of Baker Hughes), Ondeo-Nalco Energy Services (a division of Nalco
Company) and Champion Technologies, Inc. Generally, competition is based on
product quality, product performance, technical support and price.

Smith Technologies

          Products and Services. Smith Technologies is a worldwide leader in the
design, manufacture and marketing of drill bits primarily used in drilling oil
and natural gas wells. In addition, Smith Technologies is a leading provider of
downhole turbine drilling products (referred to as "turbodrills") and services
that enhance the operating performance of petroleum drill bits in certain
applications. Smith Technologies' product offerings are designed principally for
the premium market segments where faster drilling rates and greater footage
drilled provide significant economic benefits in reducing the total cost of a
well.

          Smith Technologies designs, manufactures and markets three-cone drill
bits for the petroleum industry, ranging in size from 3 1/2 to 32 inches in
diameter. Three-cone bits work by crushing and shearing the rock formation as
the bit is turned. These three-cone bits comprise two major components - the
body and the cones, which contain different types of pointed structures referred
to as "cutting structures" or "teeth." The cutting structures are either an
integral part of the steel cone with a hardmetal-applied surface (referred to as
"milled tooth") or made of an inserted material (referred to as "insert"), which
is usually tungsten carbide. The Company also produces three-cone drill bits in
which the tungsten carbide insert is coated with polycrystalline diamond. In
certain formations, bits produced with diamond-enhanced inserts last longer and
increase penetration rates, which substantially decreases overall drilling
costs. Smith Technologies is a leading provider of drill bits utilizing
diamond-enhanced insert technology.

          In addition, Smith Technologies designs, manufactures and markets
diamond drill bits. Diamond bits consist of a single body made of either a
matrix powder alloy or steel. The cutting structures of diamond bits consist of
either polycrystalline diamond cutters, which are brazed on the bit, or natural
or synthetic diamonds, which are impregnated in the bit. These bits, which range
in size from 2 3/4 to 26 inches in diameter, work by shearing the rock formation
with a milling action as the bit is turned. Smith Technologies has experienced
increased demand for rental of diamond bits as improved designs and
manufacturing processes have allowed a diamond bit to be used to drill multiple
wells in certain markets.

          Smith Technologies also designs, assembles and markets a comprehensive
line of turbodrills and provides related technical support. Turbodrills, which
operate directly above the drill bit, use the hydraulic energy provided by
drilling fluid pumps on the rig floor to deliver torque to and rotate the drill
bit. These proprietary tools are designed to provide faster rates of
penetration, operate in much higher temperature formations, deliver longer
downhole life and produce better wellbore quality than conventional positive
displacement drilling motors. The turbine drilling motor provides operators with
cost effective solutions in demanding environments such as horizontal
applications, hard formations and high-temperature zones.

          The Company manufactures polycrystalline diamond and cubic boron
nitride materials that are used in the Company's three-cone and diamond drill
bits and other specialized cutting tools. The Company believes that it is one of
the world's largest manufacturers of polycrystalline diamond. Smith Technologies
also develops and uses patented processes for applying diamonds to a curved
surface which optimize the performance of inserts used in drill bits. As a
result, the Company believes that Smith Technologies enjoys


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a competitive advantage in both material cost and technical ability over other
drill bit companies. In addition, the Company's in-house diamond research,
engineering and manufacturing capabilities enhance the Company's ability to
develop the application of diamond technology across other Smith product lines
and into non-energy markets.

          Competition. Hughes Christensen (a division of Baker Hughes), Security
DBS (a division of Halliburton) and ReedHycalog (a division of Grant Prideco,
Inc.) are the three major competitors of Smith Technologies in the drill bit
business. While Smith Technologies and these companies supply the majority of
the worldwide drill bit market, which approximated $1.7 billion in 2004, they
compete with more than 20 companies. Generally, competition for sales of drill
bits is based on a number of factors, including performance, quality,
reliability, service, price, technological advances and breadth of products. The
Company believes its quality, reliability and technological advances, such as
diamond-enhanced inserts, provide its products with a competitive advantage.

Smith Services

          Products and Services. Smith Services is a leading global provider of
technologically advanced drilling, fishing, remedial, multilateral and
completion products, services and solutions to the oil and gas drilling
industry.

          Smith Services' Drilling Products and Services business provides a
broad range of downhole impact tools for drilling applications as well as
numerous other specialized downhole drilling products and services. Smith
Services sells and rents impact drilling tools such as the HYDRA-JAR(R) Tool and
the ACCELERATOR(R) Tool, which are used to free stuck drill strings during the
drilling process. Additionally, drilling performance tools such as the
HYDRA-THRUST(R) Tool, used in the drilling process to maintain constant weight
on the drill bit, and Drilling on Gauge Subs and Borrox AP Reamers used for
maintaining hole gauge and quality of the wellbore, are examples of Smith
Services continuous commitment to developing new technology. Smith Services also
offers tubular drill string components, such as drill collars, subs,
stabilizers, kellys and HEVI-WATE(TM) DrillPipe, and provides related inspection
services, including drillstring repair and rebuild services. These components
and their placement in the drillstring are supported by engineering and field
technical services in order to optimize bottom hole management techniques.
Through state-of-the-art software, Smith Services aids the customer in
maximizing the life of drillstring components. Rotating control devices for flow
control in underbalanced / managed pressure drilling applications and automatic
connection torque monitoring and control systems are designed and manufactured
by Smith Services. Smith Services also manufactures and markets hole openers and
underreamers which are designed to create larger hole diameters in certain
sections of the wellbore. The Company's patented RHINO(R) Reamer, REAMASTER(R)
and simultaneous drilling and hole enlargement system are three examples of
products that aid the customer in realizing lower drilling costs through
technology. Through the use of the simultaneous drilling and hole enlargement
system above the drill bit, the operator may drill the main bore with the bit
and enlarge the diameter of the hole above the drill bit in the same run.

          Smith Services' Fishing and Remedial Services business provides a
comprehensive package of fishing, remedial and thru-tubing services. Fishing
operations clear and remove obstructions from a wellbore that may arise during
drilling, completion or workover activities or during a well's production phase.
This operation requires a wide variety of specialty tools, including fishing
jars, milling tools and casing cutters, all of which are manufactured by Smith
Services. These tools are operated by Company service personnel or sold or
rented to third-party fishing companies.

          Smith Services provides Wellbore Departure(TM) Systems and
Multilateral Junctions through the manufacture of proprietary casing exit tools
which are installed by trained technicians. These systems, which include the
patented TRACKMASTER(R) Plus Whipstock System and the MX(R) Multilateral
Junction, allow the operator to divert around obstructions in the main wellbore
or reach multiple production zones from the main wellbore (known as multilateral
completions). In addition, Smith Services' GEOTRACK(TM) WHIPSTOCK SYSTEM mills
the casing exit and continues to drill several hundred feet of formation in a
single trip, saving the customer time and reducing their overall drilling costs.
The Company also provides mechanical, hydraulic and explosive pipe-cutting
services to remove casing during well or platform abandonment.

          Smith Services' Completion Systems business specializes in providing
fit-for-purpose liner hanger, liner cementing equipment, isolation packers,
retrievable and permanent packers, packer products and multilateral completion
equipment. Liner hangers allow strings of casing to be suspended within the
wellbore without having to extend the string all the way to the surface and are
also used to isolate production zones and formations. Most directional and
multilateral wells include one or more hangers due to the difficult casing
programs and need for zonal isolation. Using Smith Services' POCKET SLIP(TM)
liner hanger system, long heavy liners can be suspended with minimal casing
distortion and maximum flow-by area. Packers are mechanically or


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hydraulically actuated devices which lock into place at specified depths in the
well and provide a seal between zones through expanding-element systems. The
devices therefore create isolated zones within the wellbore to permit either
specific formation production or allow for certain operations, such as cementing
or acidizing, to take place without damaging the reservoir.

          Competition. Smith Services' major competitors in the drilling,
remedial, re-entry and fishing services markets are Weatherford International,
Inc. ("Weatherford"), Baker Oil Tools (a division of Baker Hughes) and numerous
small local companies. The main competitors in the liner hanger and packer
markets are Baker Oil Tools, Weatherford and TIW Corporation. The main
competitors in the drilling and fishing jar market and the fishing product and
service market are Weatherford and National-Oilwell, Inc. ("National-Oilwell").
Competition in the drilling and completions sales, rental and services market is
primarily based on performance, quality, reliability, service, price and
response time and, in some cases, breadth of products.

DISTRIBUTION SEGMENT

Wilson

          Products and Services. Wilson is a supply-chain management company
which provides products and services to the energy, refining, petrochemical,
power generation and mining industries. Wilson operates an extensive network of
supply branches, service centers and sales offices through which it markets
pipe, valves and fittings as well as mill, safety and other maintenance
products, predominately in the United States and Canada. In addition, Wilson
provides warehouse management, vendor integration and various surplus and
inventory management services. The majority of Wilson's operations are focused
on North American distribution of maintenance, repair and operating supplies and
equipment with the remainder associated with line pipe and automated valve
products (including valve, actuator and control packages).

          Approximately two-thirds of Wilson's 2004 revenues were generated in
the energy sector, which includes exploration and production companies and
companies with operations in the petroleum industry's pipeline sector. The
remainder related to sales in the downstream and industrial market, including
refineries, petrochemical and power generation plants and other energy-focused
operations.

          Competition. Wilson's competitors in its energy segment operations
include National-Oilwell, Redman Pipe and Supply Company and a significant
number of smaller, locally based operations. Wilson's competitors in the
downstream and industrial market include Hagemeyer NV, Ferguson Enterprises,
Inc., McJunkin Corporation and W.W. Grainger, Inc. The distribution market that
Wilson participates in is highly competitive. Generally, competition involves
numerous factors, including price, experience, customer service and equipment
availability.

NON-U.S. OPERATIONS

          Sales to oil and gas exploration and production markets outside the
United States are a key strategic focus of Smith's management. The Company
markets its products and services through subsidiaries, joint ventures and sales
agents located in virtually all petroleum-producing areas of the world,
including Canada, Europe/Africa, the Middle East, Latin America and the Far
East. Approximately 55 percent, 56 percent and 53 percent of the Company's
revenues in 2004, 2003 and 2002, respectively, were derived from equipment or
services sold or provided outside the United States. The Company's Distribution
operations constitute a significant portion of the consolidated revenue base and
are concentrated in North America which serves to distort the geographic revenue
mix of the Company's Oilfield segment operations. Excluding the impact of the
Distribution operations, 65 percent, 65 percent and 64 percent of the Company's
revenues were generated in non-U.S. markets in 2004, 2003 and 2002,
respectively.

          Historically, drilling activity outside the United States has been
less volatile than U.S. based activity as the high cost exploration and
production programs outside the United States are generally undertaken by major
oil companies, consortiums and national oil companies. These entities operate
under longer-term strategic priorities than do the independent drilling
operators that are more common in the U.S. market.


                                       6

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SALES AND DISTRIBUTION

          Sales and service efforts are directed to end users in the exploration
and production industry, including major and independent oil companies, national
oil companies and independent drilling contractors. The Company's products and
services are primarily marketed through the direct sales force of each business
unit. In certain non-U.S. markets where direct sales efforts are not
practicable, the Company utilizes independent sales agents, distributors or
joint ventures.

          Smith maintains field service centers, which function as repair and
maintenance facilities for rental tools, operations for remedial and completion
service and a base for the Company's global sales force, in all major oil and
gas producing regions of the world. The location of these service centers near
the Company's customers is an important factor in maintaining favorable customer
relations.

MANUFACTURING

          The Company's manufacturing operations, along with quality control
support, are designed to ensure that all products and services marketed by the
Company will meet standards of performance and reliability consistent with the
Company's reputation in the industry.

          Management believes that it generally has sufficient internal
manufacturing capacity to meet anticipated demand for its products and services.
During periods of peak demand, certain business units utilize outside resources
to provide additional manufacturing capacity.

RAW MATERIALS

          Through its company-owned mines in and outside the United States, M-I
SWACO has the capability to produce a large portion of its requirements for
barite and bentonite. Barite reserves are mined in the United States, the United
Kingdom and Morocco. Bentonite is produced from ore deposits in the United
States. Mining exploration activities continue worldwide to locate and evaluate
ore bodies to ensure deposits are readily available for production when market
conditions dictate. In addition to its own production, M-I SWACO purchases the
majority of its worldwide barite requirement from suppliers outside the United
States, mainly the People's Republic of China, India and Morocco.

          The Company purchases a variety of raw materials for its Smith
Technologies and Smith Services units, including alloy and stainless steel bars,
tungsten carbide inserts and forgings. Generally, the Company is not dependent
on any single source of supply for any of its raw materials or purchased
components, and believes that numerous alternative supply sources are available
for all such materials. The Company does not expect any interruption in supply,
but there can be no assurance that there will be no price or supply issues over
the long-term. The Company produces polycrystalline diamond materials in Provo,
Utah and Scurelle, Italy for utilization in various Company products as well as
direct customer sales. The Company believes that it enjoys a competitive
advantage in the manufacture of diamond drill bits because it is the only
diamond drill bit producer with substantial polycrystalline diamond
manufacturing capabilities.

PRODUCT DEVELOPMENT, ENGINEERING AND PATENTS

          The Company's business units maintain product development and
engineering departments whose activities are focused on improving existing
products and services and developing new technologies to meet customer demands
for improved drilling performance and environmental-based solutions for drilling
and completion operations. The Company's primary research facilities are located
in Houston, Texas; Stavanger, Norway; Aberdeen, Scotland; and Florence,
Kentucky.

          The Company also maintains a drill bit database which records the
performance of drill bits over the last 19 years, including those manufactured
by competitors. This database gives the Company the ability to monitor, among
other things, drill bit failures and performance improvements related to product
development. The Company believes this proprietary database gives it a
competitive advantage in the drill bit business.

          The Company has historically invested significant resources in
research and engineering in order to provide customers with broader product
lines and technologically-advanced products and services. The Company's
expenditures for research and engineering activities are attributable to the
Company's Oilfield Products and Services segment and totaled $67.2 million in
2004,


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$55.6 million in 2003 and $50.6 million in 2002. In 2004, research and
engineering expenditures approximated 2.1 percent of the Company's Oilfield
Products and Services segment revenues.

          Although the Company has over 2,000 issued and pending patents and
regards its patents and patent applications as important in the operation of its
business, it does not believe that any significant portion of its business is
materially dependent upon any single patent.

EMPLOYEES

          At December 31, 2004, the Company had 13,235 full time employees
throughout the world. Most of the Company's employees in the United States are
not covered by collective bargaining agreements except in certain U.S. mining
operations of M-I SWACO and several distribution locations of Wilson. The
Company considers its labor relations to be satisfactory.

OFFICERS OF THE REGISTRANT

     (a)  The names and ages of all officers of the Company, all positions and
          offices with the Company presently held by each person named and their
          business experience are stated below. Positions, unless otherwise
          specified, are with the Company.

<TABLE>
<CAPTION>
       NAME, AGE AND POSITIONS          PRINCIPAL CURRENT OCCUPATION AND OTHER SIGNIFICANT POSITIONS HELD
-------------------------------------   -----------------------------------------------------------------
<S>                                     <C>
Doug Rock (58).......................   Chairman of the Board since February 1991, elected Chief
   Chairman of the Board, Chief         Executive Officer in March 1989 and served as President and Chief
   Executive Officer, President         Operating Officer since December 1987. Held various positions
   and Chief Operating Officer          since joining the Company in June 1974, served as President of
                                        the Company's Drilco Division beginning April 1982 and was named
                                        President of the Company's Smith Tool Division in July 1985.

Loren K. Carroll (61)................   President and Chief Executive Officer of M-I SWACO since March
   Executive Vice President of          1994, Executive Vice President since October 1992 and member of
   the Company, President and           the Board of Directors since November 1987. Joined Company in
   Chief Executive Officer of           December 1984 as Vice President and Chief Financial Officer and
   M-I SWACO                            served in that capacity until March 1989. Rejoined the Company in
                                        October 1992 as Executive Vice President and Chief Financial
                                        Officer.

Margaret K. Dorman (41)..............   Senior Vice President, Chief Financial Officer and Treasurer
   Senior Vice President, Chief         since June 1999. Joined Company as Director of Financial Reporting
   Financial Officer and Treasurer      in December 1995 and named Vice President, Controller and
                                        Assistant Treasurer in February 1998.

Neal S. Sutton (59)..................   Senior Vice President--Administration, General Counsel and
   Senior Vice President--              Secretary since December 1994. Joined Company as Vice President,
   Administration, General              Secretary and General Counsel in January 1991 and named Vice
   Counsel and Secretary                President-Administration in March 1992.

Roger A. Brown (60)..................   President, Smith Technologies since July 1998. Joined Company as
   President, Smith Technologies        President, Smith Diamond Technology in April 1995.

John J. Kennedy (52).................   President and Chief Executive Officer, Wilson since June 1999.
   President and Chief Executive        Joined Company as Treasury Manager in November 1986, named
   Officer, Wilson                      Treasury Director responsible for International Operations in
                                        November 1987 and served as Treasurer beginning May 1991. Elected
                                        Vice President, Chief Accounting Officer and Treasurer in March
                                        1994 and named Senior Vice President, Chief Financial Officer and
                                        Treasurer in April 1997.

Richard A. Werner (63)...............   President, Smith Services since May 1994. Joined Company as Vice
   President, Smith Services            President and General Manager-Downhole Tools and Services in May
                                        1991 and named Vice President and General Manager-Drilco/Servco in
                                        March 1993. Served as Vice President and General Manager-Smith
                                        Services beginning December 1993.

Malcolm W. Anderson (57).............   Vice President, Human Resources since May 2004. Vice President
   Vice President,                      Human Resources of Hewlett Packard from January 2001 to April
   Human Resources                      2004. Vice President Human Resources of Weatherford International
                                        Ltd. from April 1996 to December 2000.

David R. Cobb (39)...................   Vice President and Controller since July 2002. Joined Company as
   Vice President and Controller        Assistant Controller in October 2001. Assistant Treasurer, Kent
                                        Electronics Corporation from April 1997 to September 2001.

Geri D. Wilde (54)...................   Vice President, Taxes since February 1998. Joined Company as
   Vice President, Taxes and            Manager of Taxes and Payroll of M-I SWACO in December 1986 and
   Assistant Treasurer                  named Director of Taxes and Assistant Treasurer in April 1997.
</TABLE>

     (b) All officers of the Company are elected annually by the Board of
Directors at the meeting held immediately following the annual meeting of
stockholders. They hold office until their successors are elected and qualified.

     There are no family relationships between the officers of the Company.


                                       8

<PAGE>

RISK FACTORS

          This document and other filings with the Securities and Exchange
Commission contain "forward-looking statements", as defined in the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
discuss the Company's outlook, financial projections, business strategies as
well as various other matters.

          Our forward-looking statements are based on assumptions that we
believe to be reasonable but that may not prove to be accurate. All of the
Company's forward-looking information is, therefore, subject to risks and
uncertainties that could cause actual results to differ materially from the
results expected. Although it is not possible to identify all factors, these
risks and uncertainties include the risk factors discussed below.

          Demand for our products and services is dependent upon the level of
oil and natural gas exploration and development activities. The level of
worldwide oil and natural gas development activities is primarily influenced by
the price of oil and natural gas and price expectations. In addition to oil and
natural gas prices, the following factors impact exploration and development
activity and may lead to significant changes in worldwide activity levels:

               Overall level of global economic growth and activity;
               Actual and perceived changes in the supply and demand for oil and
               natural gas;
               Political stability of oil-producing countries;
               Finding and development costs of operations; and
               Decline and depletion rates for oil and natural gas wells.

          Changes in any of these factors could adversely impact our financial
condition or results of operations.

          We are a multinational oilfield service company and have operations in
certain countries that are inherently subject to risks of war, local economic
conditions, political disruption, civil disturbance and policies that may:

               Disrupt oil and gas exploration and production activities and our
               operations;
               Restrict the movement of funds and other assets;
               Lead to U.S. government or international sanctions; and
               Limit access to markets.

          The occurrence of any of these events could adversely impact our
financial condition or results of operations.

                                       9

<PAGE>

ITEM 2. PROPERTIES

          The principal facilities and properties utilized by the Company at
December 31, 2004 are shown in the table below. Generally, the facilities and
properties are owned by the Company.

<TABLE>
<CAPTION>
                                                                                                                   Approx.
                                                        Principal Products Processed                     Land    Bldg. Space
               Location                                        or Manufactured                         (Acres)     (sq.ft.)
-------------------------------------   ------------------------------------------------------------   -------   -----------
<S>                                     <C>                                                            <C>       <C>
Oilfield Products and Services Segment:
Houston, Texas.......................   Tubulars, surface and downhole tools, remedial products,
                                        liner hangers, diamond drill bits, drilling and fishing jars
                                        and fishing tool equipment                                         73      708,000
Houston, Texas.......................   M-I SWACO corporate headquarters and research center               18      223,000
Ponca City, Oklahoma.................   Three-cone drill bits                                              15      207,000
Florence, Kentucky...................   Separator units, mill units, parts, screens and motors             15      145,000
Aberdeen, Scotland...................   Downhole tools and remedial products                               10      132,000
Greybull, Wyoming....................   Bentonite mine and processing                                   8,394      110,000
Tulsa, Oklahoma......................   Oilfield and industrial screening products                          7       95,000
Saline di Volterra, Italy............   Three-cone drill bits                                              11       92,000
Edinburgh, Scotland..................   Wire cloth and oilfield screening products                          3       91,400
Aberdeen, Scotland...................   Downhole tools                                                     10       91,000
Karmoy, Norway.......................   Barite and bentonite processing                                     5       51,000
Greystone, Nevada....................   Barite mine and processing                                        268       50,000
Battle Mountain, Nevada..............   Barite processing                                                  23       43,000
Provo, Utah..........................   Synthetic diamond materials                                         4       43,000
Nisku, Canada........................   Tubulars and drill collars                                         10       42,000
Zelmou, Morocco......................   Barite mine                                                     3,954       41,000
Zavalla, Texas.......................   Drilling fluid chemical products                                   33       36,000
Nivellas, Belgium....................   Separator units, mill units, parts, screens and motors              5       32,000
Scurelle, Italy......................   Diamond drill bits and synthetic diamond materials                  4       31,000
Amelia, Louisiana....................   Barite processing                                                  26       25,000
Spruce Grove, Canada.................   Drilling fluid processing                                           3       24,000
Berra, Italy.........................   Solids control equipment                                            2       24,000
Salzweld, Germany....................   Drilling fluid processing                                           2       23,000
Galveston, Texas.....................   Barite processing                                                   6       21,000
Macon, Georgia.......................   Separator units and screens                                         1       18,000
Aberdeen, Scotland...................   Barite and bentonite processing                                     2       12,000
Foss/Aberfeldy, Scotland.............   Barite mine and processing                                        102       10,000
Grand Prairie, Canada................   Fishing and remedial services                                       2        9,000
Mountain Springs, Nevada.............   Barite mine                                                       900           --

Distribution Segment::
Houston, Texas.......................   Pipe, valves and fittings                                          11      198,000
</TABLE>

          The Company considers its mines and manufacturing and processing
facilities to be in good condition and adequately maintained. The Company also
believes its facilities are suitable for their present and intended purposes and
are adequate for the Company's current and anticipated level of operations.

          The Company's headquarters is located in a leased office building in
Houston, Texas. The Company leases various other administrative and sales
offices, as well as warehouses and service centers in the United States and
other countries in which it conducts business. The Company believes that it will
be able to renew and extend its property leases on terms satisfactory to the
Company or, if necessary, locate substitute facilities on acceptable terms.

ITEM 3. LEGAL PROCEEDINGS

          Information relating to various commitments and contingencies,
including legal proceedings, is described in Note 17 of the Notes to
Consolidated Financial Statements included elsewhere in this report on Form
10-K and is incorporated herein by reference.


                                       10


<PAGE>

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

     None.

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

          The common stock of the Company is traded on the New York Stock
Exchange and the Pacific Stock Exchange. The following are the high and low sale
prices for the Company's common stock as reported on the New York Stock Exchange
Composite Tape for the periods indicated.

<TABLE>
<CAPTION>
               2003 COMMON STOCK                   2004 COMMON STOCK
       ---------------------------------   ---------------------------------
         Q1       Q2       Q3       Q4       Q1       Q2       Q3       Q4
       ------   ------   ------   ------   ------   ------   ------   ------
<S>    <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
High   $36.48   $41.55   $39.30   $42.52   $54.71   $57.75   $61.42   $62.50
Low    $29.85   $34.47   $33.96   $35.86   $40.27   $48.05   $52.18   $53.98
</TABLE>

          On March 8, 2005, the Company had 2,037 common stock holders of record
and the last reported closing price on the New York Stock Exchange Composite
Tape was $64.34.

Stock Repurchases

          During 2001, the Company's Board of Directors authorized a share
buyback program which allows for the repurchase of up to 5.0 million shares of
common stock, subject to regulatory issues, market considerations and other
relevant factors. During the fourth quarter of 2004, the Company repurchased an
additional 0.7 million shares of common stock under the program at an aggregate
cost of $38.0 million bringing the total number of shares acquired under the
program to 2.9 million as of December 31, 2004. The acquired shares have been
added to the Company's treasury stock holdings and may be used in the future for
acquisitions or other corporate purposes.

          The following table summarizes the Company's repurchase activity for
the three months ended December 31, 2004:

<TABLE>
<CAPTION>
                                                 Total Number of
                   Total Number     Average    Shares Purchased as   Number of Shares that
                    of Shares     Price Paid     Part of Publicly     May Yet Be Purchased
     Period         Purchased      per Share    Announced Program       Under the Program
----------------   ------------   ----------   -------------------   ---------------------
<S>                <C>            <C>          <C>                   <C>
October 1 - 31             --       $   --                --               2,813,600
November 1 - 30            --       $   --                --               2,813,600
December 1 - 31       693,600       $54.75           693,600               2,120,000
                      -------       ------           -------               ---------
4th Quarter 2004      693,600       $54.75           693,600               2,120,000
</TABLE>

Dividend Program

          The Company has not paid dividends on its common stock since the first
quarter of 1986. However, on February 2, 2005, the Company's Board of Directors
approved a cash dividend program for stockholders and declared a quarterly cash
dividend of $0.12 per share, with the first dividend payment to be made April
15, 2005 to stockholders of record on March 15, 2005. The level of future
dividend payments will be at the discretion of the Board of Directors and will
depend upon the Company's financial condition, earnings and cash flow from
operations, the level of its capital expenditures, compliance with certain debt
covenants, its future business prospects and other factors that the Board of
Directors deems relevant.

                                       11

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                            FOR THE YEARS ENDED DECEMBER 31,
                                             --------------------------------------------------------------
                                               2004(a)       2003         2002         2001         2000
                                             ----------   ----------   ----------   ----------   ----------
                                                          (In thousands, except per share data)
<S>                                          <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenues .................................   $4,419,015   $3,594,828   $3,170,080   $3,551,209   $2,761,014

Gross profit .............................    1,351,939    1,075,931      918,302    1,045,804      745,169

Operating income .........................      438,764      328,747      256,148      371,510      199,026

Income before cumulative effect
   of change in accounting principle .....      182,451      124,634       93,189      152,145       72,800

Earnings per share before cumulative
   effect of change in accounting
   principle - diluted basis (b) .........         1.78         1.24         0.93         1.51         0.72

BALANCE SHEET DATA:
Total assets .............................   $3,506,778   $3,097,047   $2,749,545   $2,735,828   $2,295,287

Long-term debt ...........................      387,798      488,548      441,967      538,842      374,716

Total stockholders' equity ...............    1,400,811    1,235,776    1,063,535      949,159      817,481
</TABLE>

          The Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Form 10-K should be read in order to understand
factors such as changes in the method of accounting for goodwill, business
combinations completed during 2004, 2003 and 2002, and unusual items which may
affect the comparability of the information shown above.

(a)  In 2004, the Company recognized a $31.4 million, or $0.20 per share after
     tax, charge related to a patent infringement lawsuit.

(b)  All fiscal years prior to 2002 have been restated for the impact of a
     two-for-one stock split, which was effective July 8, 2002.


                                       12

<PAGE>

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

GENERAL

          The following "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is provided to assist readers in
understanding the Company's financial performance during the periods presented
and significant trends which may impact the future performance of the Company.
This discussion should be read in conjunction with the consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Form 10-K.

COMPANY PRODUCTS AND OPERATIONS

          The Company manufactures and markets premium products and services to
the oil and gas exploration and production industry, the petrochemical industry
and other industrial markets. The Company provides a comprehensive line of
technologically-advanced products and engineering services, including drilling
and completion fluid systems, solids-control and separation equipment,
waste-management services, oilfield production chemicals, three-cone and diamond
drill bits, turbine products, fishing services, drilling tools, underreamers,
casing exit and multilateral systems, packers and liner hangers. The Company
also offers supply chain management solutions through an extensive North
American branch network providing pipe, valves and fittings as well as mill,
safety and other maintenance products.

          The Company's operations are largely driven by the level of
exploration and production ("E&P") spending in major energy-producing regions
around the world and the depth and complexity of these projects. Although E&P
spending is significantly influenced by the market price of oil and natural gas,
it may also be affected by supply and demand fundamentals, finding and
development costs, decline and depletion rates, political actions and
uncertainties, environmental concerns, the financial condition of independent
E&P companies and the overall level of global economic growth and activity. In
addition, approximately 10 percent of the Company's consolidated revenues relate
to the downstream energy sector, including petrochemical plants and refineries,
whose spending is largely impacted by the general condition of the U.S. economy.

          Capital investment by energy companies is largely divided into two
markets which vary greatly in terms of primary business drivers and associated
volatility levels. North American drilling activity is primarily influenced by
natural gas fundamentals, with approximately 85 percent of the current rig count
focused on natural gas finding and development activities. Conversely, drilling
in areas outside of North America is more dependent on crude oil fundamentals,
which influence over three-quarters of international drilling activity.
Historically, business in markets outside of North America has proved to be less
volatile as the high cost E&P programs in these regions are generally undertaken
by major oil companies, consortiums and national oil companies as part of a
longer-term strategic development plan. Although over half of the Company's
consolidated revenues were generated in North America during 2004, Smith's
profitability was largely dependent upon business levels in markets outside of
North America. The Distribution segment, which accounts for approximately
one-quarter of consolidated revenues and primarily supports a North American
customer base, serves to distort the geographic revenue mix of the Company's
Oilfield segment operations. Excluding the impact of the Distribution
operations, 59 percent of the Company's 2004 revenues were generated in markets
outside of North America.

BUSINESS OUTLOOK

          Average worldwide activity levels grew 12 percent in 2004, as higher
commodity prices influenced natural gas drilling - particularly in the U.S.
land-based market. The global rig count is expected to increase modestly in
2005, as exploration and production companies focus on higher-reserve projects
in the U.S. Gulf of Mexico, Europe/Africa and the Middle East markets. In
addition to the anticipated increase in drilling activity and the more favorable
product mix which could result from a recovery in the U.S. deepwater market,
recently announced price increases in our Oilfield segment businesses could also
influence near-term financial results. Although a number of factors impact
drilling activity levels, our business is highly dependent on the general
economic environment in the United States and other major world economies -
which ultimately impact energy consumption and the resulting demand for our
products and services. A significant deterioration in the global economic
environment could adversely impact worldwide drilling activity and the future
financial results of the Company.


                                       13

<PAGE>

FORWARD-LOOKING STATEMENTS

          This discussion contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning, among other
things, the Company's outlook, financial projections and business strategies,
all of which are subject to risks, uncertainties and assumptions. These
forward-looking statements are identified by their use of terms such as
"anticipate," "believe," "could," "estimate," "expect," "project" and similar
terms. The statements are based on certain assumptions and analyses made by the
Company that it believes are appropriate under the circumstances. Such
statements are subject to general economic and business conditions, industry
conditions, changes in laws or regulations and other risk factors outlined
elsewhere in this Form 10-K, many of which are beyond the control of the
Company. Should one or more of these risks or uncertainties materialize, or
should the assumptions prove incorrect, actual results may vary.


                                       14

<PAGE>

RESULTS OF OPERATIONS

Segment Discussion

          The Company markets its products and services throughout the world
through four business units which are aggregated into two reportable segments.
The Oilfield Products and Services segment consists of three business units: M-I
SWACO, Smith Technologies and Smith Services. The Distribution segment includes
the Wilson business unit. The revenue discussion below has been summarized by
business unit in order to provide additional information in analyzing the
Company's operations.

<TABLE>
<CAPTION>
                                                     FOR THE YEARS ENDED DECEMBER 31,
                                          ------------------------------------------------------
                                                2004               2003               2002
                                          ----------------   ----------------   ----------------
                                            AMOUNT      %      AMOUNT      %      AMOUNT      %
                                          ----------   ---   ----------   ---   ----------   ---
<S>                                       <C>          <C>   <C>          <C>   <C>          <C>
FINANCIAL DATA: (dollars in thousands)
REVENUES:
   M-I SWACO ..........................   $2,231,884    50   $1,865,851    52   $1,558,672    49
   Smith Technologies .................      511,410    12      403,261    11      324,735    10
   Smith Services .....................      493,045    11      409,162    11      399,502    13
                                          ----------   ---   ----------   ---   ----------   ---
      Oilfield Products and Services ..    3,236,339    73    2,678,274    74    2,282,909    72
   Wilson .............................    1,182,676    27      916,554    26      887,171    28
                                          ----------   ---   ----------   ---   ----------   ---
         Total ........................   $4,419,015   100   $3,594,828   100   $3,170,080   100
                                          ==========   ===   ==========   ===   ==========   ===

GEOGRAPHIC REVENUES:
   United States:
      Oilfield Products and Services ..   $1,128,294    26   $  925,148    26   $  813,946    26
      Distribution ....................      854,173    19      667,095    18      678,764    21
                                          ----------   ---   ----------   ---   ----------   ---
         Total United States ..........    1,982,467    45    1,592,243    44    1,492,710    47
                                          ----------   ---   ----------   ---   ----------   ---
   Canada:
      Oilfield Products and Services ..      225,629     5      171,653     5      117,014     4
      Distribution ....................      261,923     6      191,221     5      169,626     5
                                          ----------   ---   ----------   ---   ----------   ---
         Total Canada .................      487,552    11      362,874    10      286,640     9
                                          ----------   ---   ----------   ---   ----------   ---
   Non-North America:
      Oilfield Products and Services ..    1,882,416    43    1,581,483    44    1,351,949    43
      Distribution ....................       66,580     1       58,228     2       38,781     1
                                          ----------   ---   ----------   ---   ----------   ---
         Total Non-North America ......    1,948,996    44    1,639,711    46    1,390,730    44
                                          ----------   ---   ----------   ---   ----------   ---
            Total Revenue .............   $4,419,015   100   $3,594,828   100   $3,170,080   100
                                          ==========   ===   ==========   ===   ==========   ===

OPERATING INCOME:
   Oilfield Products and Services .....   $  423,648    13   $  343,486    13   $  266,692    12
   Distribution .......................       26,513     2       (7,897)   --       (4,026)   --
   General Corporate ..................      (11,397)    *       (6,842)    *       (6,518)    *
                                          ----------   ---   ----------   ---   ----------   ---
         Total ........................   $  438,764    10   $  328,747     9   $  256,148     8
                                          ==========   ===   ==========   ===   ==========   ===

MARKET DATA:
AVERAGE WORLDWIDE RIG COUNT: (1)
   United States ......................        1,417    49        1,216    47          946    43
   Canada .............................          348    12          339    13          255    12
   Non-North America ..................        1,145    39        1,050    40          990    45
                                          ----------   ---   ----------   ---   ----------   ---
         Total ........................        2,910   100        2,605   100        2,191   100
                                          ==========   ===   ==========   ===   ==========   ===
   Onshore ............................        2,443    84        2,143    82        1,734    79
   Offshore ...........................          467    16          462    18          457    21
                                          ----------   ---   ----------   ---   ----------   ---
         Total ........................        2,910   100        2,605   100        2,191   100
                                          ==========   ===   ==========   ===   ==========   ===

AVERAGE COMMODITY PRICES:
   Crude Oil ($/Bbl)(2)................   $    41.34         $    31.06         $    26.08
   Natural Gas ($/mcf)(3)..............         5.68               5.29               3.10
</TABLE>

(1)  Source: M-I SWACO.

(2)  Average West Texas Intermediate ("WTI") spot closing prices.

(3)  Average weekly composite spot U.S. wellhead prices.

*    not meaningful


                                       15

<PAGE>

Oilfield Products and Services Segment

Revenues

          M-I SWACO primarily provides drilling and completion fluid systems,
engineering and technical services to the oil and gas industry. Additionally,
these operations provide oilfield production chemicals and manufacture and
market equipment and services used for solids-control, particle separation,
pressure control, rig instrumentation and waste-management. M-I SWACO is
significantly influenced by spending in markets outside of North America, which
contributes approximately two-thirds of the unit's revenues, and by its exposure
to the U.S. offshore market, which constitutes approximately 10 percent of the
revenue base. U.S. offshore drilling programs, which account for approximately
four percent of the worldwide rig count, are generally more revenue-intensive
than land-based projects due to the complex nature of the related drilling
environment. For the year ended December 31, 2004, M-I SWACO reported revenues
of $2.2 billion. The majority of the revenue increase was generated in markets
outside of North America, where revenues grew 21 percent largely due to the
underlying activity level increase of nine percent. Although increased
investment by exploration and production companies in Latin America and the
Middle East contributed to the improvement, new contract awards and increased
customer demand for waste management product offerings in several major
Europe/Africa markets also had a favorable impact. Approximately one-third of
the year-over-year revenue growth was reported in North America, as increased
customer spending related to land-based projects more than offset the impact of
reduced drilling activity in the higher-margin U.S. offshore market. M-I SWACO's
revenues totaled $1.9 billion for the year ended December 31, 2003, an increase
of 20 percent above the prior year period. Excluding the effect of acquired
operations, revenues rose 14 percent above 2002 levels impacted by increased
sales volumes in markets outside of North America. On a geographic basis,
increased E&P spending and new contract awards in Latin America, the Former
Soviet Union and West Africa influenced the higher reported revenues. The
year-over-year base revenue growth was also impacted by the significant increase
in the number of North American land-based drilling programs and, to a lesser
extent, a favorable customer mix in the U.S. offshore market.

          Smith Technologies designs, manufactures and sells three-cone drill
bits, diamond drill bits and turbines for use in the oil and gas industry. Due
to the nature of its product offerings, revenues for these operations typically
correlate more closely to the rig count than any of the Company's other
businesses. Moreover, Smith Technologies generally has the highest North
American revenue exposure of the Oilfield segment units. For the year ended
December 31, 2004, Smith Technologies reported revenues of $511.4 million, a 27
percent increase over the prior year level. Approximately three-quarters of the
revenue growth was reported in North America, as increased activity levels
impacted demand for diamond bit rentals. Additionally, increased market
penetration resulting from new product designs and, to a lesser extent, improved
product pricing also contributed to the revenue variance. Smith Technologies
reported revenues of $403.3 million for the year ended December 31, 2003, an
increase of 24 percent over the prior year. Excluding incremental revenues from
businesses acquired in the latter half of 2002, base revenues were approximately
19 percent above the prior year and approximated the increase in the worldwide
rig count. The year-to-year base revenue growth was generated in North America,
reflecting the higher level of land-based drilling activity during 2003 and, to
a lesser extent, the impact of new product introductions.

          Smith Services manufactures and markets products and services used in
the oil and gas industry for drilling, work-over, well completion and well
re-entry. Revenues for Smith Services are evenly distributed between North
America and the international markets and are heavily influenced by the
complexity of drilling projects, which drive demand for a wider range of its
product offerings. For the year ended December 31, 2004, Smith Services reported
revenues of $493.0 million, a 21 percent increase over the amount reported in
the prior year. Approximately three-quarters of the revenue improvement was
generated in the North American market, influenced by higher activity levels,
increased demand for tubular products and to a lesser extent, incremental
revenues from acquired operations. For the year ended December 31, 2003, Smith
Services reported revenues of $409.2 million, a two percent increase from the
prior year. The year-to-year revenue comparison was impacted by a 50 percent
reduction in U.S. drill pipe product sales, which are not highly correlated to
drilling activity. Excluding the impact of drill pipe sales, revenues increased
seven percent above the prior year, primarily attributable to higher E&P
spending in North America and certain Middle East markets. On a product basis,
the majority of the core revenue growth was driven by higher demand for remedial
product and service lines, including new product introductions.


                                       16

<PAGE>

Operating Income

          Operating income for the Oilfield Products and Services segment was
$423.6 million, or 13.1 percent of revenues, for the year ended December 31,
2004. Excluding the impact of a $31.4 million litigation-related charge recorded
during 2004, segment operating margins improved 1.3 percentage points due to
gross margin expansion and, to a lesser extent, reduced operating expenses as a
percentage of revenues. The gross margin improvement largely reflects increased
fixed cost absorption in the Company's manufacturing operations and, to a lesser
extent, the impact of price increases introduced in the drilling fluid and drill
bit operations. Fiscal 2004 operating income, net of the litigation charge,
increased $111.6 million over the prior year attributable to the impact of
higher revenue volumes on gross profit, partially offset by growth in
variable-based operating expenses associated with the expanding business base.
For the year ended December 31, 2003, Oilfield operating income was $343.5
million, or 12.8 percent of revenues. Segment operating margins increased one
percentage point above the prior year level reflecting a combination of gross
margin expansion and, to a lesser extent, reduced operating expenses as a
percentage of revenues. The gross margins were influenced by a favorable shift
in the revenue mix towards higher-margin products and, to a lesser extent,
improved expense coverage resulting from the impact of increased sales volumes
on the segment's manufacturing and service infrastructure.

Distribution Segment

Revenues

          Wilson markets pipe, valves, fittings and mill, safety and other
maintenance products to energy and industrial markets, primarily through an
extensive network of supply branches in the United States and Canada. The
segment has the most significant North American revenue exposure of any of the
Company's operations with approximately 95 percent of Wilson's 2004 revenues
generated in those markets. Moreover, approximately one-third of Wilson's
revenues relate to sales to the downstream energy sector, including
petrochemical plants and refineries, whose spending is largely influenced by the
general state of the U.S. economic environment. Additionally, certain customers
in this sector utilize petroleum products as a base material and, accordingly,
are adversely impacted by increases in crude oil and natural gas prices. For the
year ended December 31, 2004, Wilson reported revenues totaling $1.2 billion, an
increase of 29 percent from the prior year period. Two-thirds of the revenue
improvement was reported in Wilson's upstream energy segment, attributable to
higher North American activity levels, increased demand for tubular products and
new contract awards. Wilson reported revenues of $916.6 million for the year
ended December 31, 2003, three percent above the prior year. The year-over-year
revenue increase was reported in the energy sector operations driven by the
higher level of North American drilling and completion activity. Lower
industrial sales volumes, primarily related to reduced maintenance and repair
spending in the refining, petrochemical and power generation customer base
impacted the reported revenue variance.

Operating Income

          Operating income for the Distribution segment was $26.5 million, or
2.2 percent of revenues, for the year ended December 31, 2004. Excluding a
charge recorded in the prior year, segment operating income increased $29.8
million above the amount reported in 2003, equating to incremental operating
income of 11 percent of revenues. Incremental operating income was influenced by
year-over-year improvement reported in both the energy and industrial sector
operations attributable to increased coverage of fixed sales and administrative
costs and, to a lesser extent, the impact of favorable pricing driven by a
competitive market for tubular products. For the year ended December 31, 2003,
operating income for the Distribution segment declined $3.9 million from the
2002 level, impacted by a $4.6 million charge recorded in the fourth quarter of
2003. Approximately $3.8 million of this amount was an inventory-related charge,
while the remainder provided for estimated losses associated with the bankruptcy
of a large industrial customer. Excluding this charge, Distribution operating
results increased $0.7 million over the amount reported in 2002, equating to
incremental operating income of approximately two percent of revenues. The
incrementals were below those historically reported in the segment, impacted by
the higher mix of project and export orders, which typically generate lower
comparable margins.


                                       17

<PAGE>

          For the periods indicated, the following table summarizes the results
of operations of the Company and presents these results as a percentage of total
revenues (dollars in thousands):

<TABLE>
<CAPTION>
                                                      FOR THE YEARS ENDED DECEMBER 31,
                                           ------------------------------------------------------
                                                 2004               2003               2002
                                           ----------------   ----------------   ----------------
                                             AMOUNT      %      AMOUNT      %      AMOUNT      %
                                           ----------   ---   ----------   ---   ----------   ---
<S>                                        <C>          <C>   <C>          <C>   <C>          <C>
Revenues ...............................   $4,419,015   100   $3,594,828   100   $3,170,080   100
                                           ----------   ---   ----------   ---   ----------   ---

Gross profit ...........................    1,351,939    31    1,075,931    30      918,302    29

Operating expenses .....................      913,175    21      747,184    21      662,154    21
                                           ----------   ---   ----------   ---   ----------   ---

Operating income .......................      438,764    10      328,747     9      256,148     8

Interest expense .......................       38,762     1       40,964     1       40,928     1
Interest income ........................       (1,300)   --       (1,973)   --       (2,579)   --
                                           ----------   ---   ----------   ---   ----------   ---

Income before income taxes,
   minority interests and cumulative
   effect of change in accounting
   principle ...........................      401,302     9      289,756     8      217,799     7

Income tax provision ...................      129,721     3       93,334     3       66,632     2

Minority interests .....................       89,130     2       71,788     2       57,978     2
                                           ----------   ---   ----------   ---   ----------   ---

Income before cumulative effect
   of change in accounting principle ...      182,451     4      124,634     3       93,189     3
                                           ----------   ---   ----------   ---   ----------   ---

Cumulative effect of change in
   accounting principle, net of tax
   and minority interests ..............           --    --       (1,154)   --           --    --
                                           ----------   ---   ----------   ---   ----------   ---

Net income .............................   $  182,451     4   $  123,480     3   $   93,189     3
                                           ==========   ===   ==========   ===   ==========   ===
</TABLE>

2004 versus 2003

          Consolidated revenues increased to $4.4 billion for the year ended
December 31, 2004, 23 percent above the prior year period. The majority of the
year-over-year dollar variance was reported in the Oilfield segment attributable
to a combination of higher activity levels, increased market penetration and, to
a lesser extent, improved product pricing. On a geographic basis, two-thirds of
the revenue improvement was reported in the Western Hemisphere as the impact of
higher land-based drilling more than offset revenue reductions associated with
activity declines experienced in the U.S. offshore market. Improved business
volumes in the Eastern Hemisphere market also contributed to the year-over-year
revenue variance, reflecting the higher number of exploration and production
projects and the impact of new contract awards.

          Gross profit totaled $1.4 billion, or 31 percent of revenues, one
percentage point above the gross profit margins generated in the comparable
prior year period. Although the margin expansion was largely driven by the
impact of increased sales volumes on fixed manufacturing and service
infrastructure costs, a shift in the business mix toward higher-margin product
offerings and improved product pricing also had a favorable effect. On an
absolute dollar basis, gross profit was $276.0 million above the prior year
period primarily reflecting the increased sales volumes in the Oilfield
operations.

          Operating expenses, consisting of selling, general and administrative
expenses, increased $166.0 million from the amount reported in the prior year.
The operating expense growth was impacted by a $28.8 million litigation-related
charge recognized during 2004 to reflect an estimated loss provision, legal fees
and other costs directly associated with a patent infringement case. Excluding
the charge, operating expenses, as a percentage of revenues, decreased one
percentage point from the prior year period. Improved fixed cost coverage in the
sales and administrative functions accounted for the majority of the operating
expense percentage decline. The majority of the absolute dollar increase was


                                       18

<PAGE>

attributable to variable-related costs associated with the improved business
volumes, including investment in personnel and infrastructure to support the
expanding business operations. To a lesser extent, increased employee
profit-sharing amounts directly attributable to the reported profitability
levels, increased medical and casualty insurance program costs and legal fees
associated with defending patent infringement lawsuits also contributed to the
year-over-year operating expense growth.

          Net interest expense, which represents interest expense less interest
income, totaled $37.5 million in 2004. Net interest expense decreased $1.5
million from the prior year reflecting lower average debt levels between the
periods.

          The effective tax rate approximated 32 percent, which was comparable
to the level reported in the prior year, but below the U.S. statutory rate. The
effective tax rate was lower than the U.S. statutory rate due to the impact of
M-I SWACO's U.S. partnership earnings for which the minority partner is directly
responsible for its related income taxes. The Company properly consolidates the
pretax income related to the minority partner's share of U.S. partnership
earnings but excludes the related tax provision.

          Minority interests reflect the portion of the results of
majority-owned operations which are applicable to the minority interest
partners. Minority interests totaled $89.1 million in 2004, a $17.3 million
increase from the prior year. The year-over-year increase primarily reflects the
higher profitability of the M-I SWACO joint venture and, to a lesser extent,
improved earnings reported by CE Franklin Ltd.

2003 versus 2002

          Consolidated revenues were $3.6 billion for the year ended December
31, 2003, 13 percent above the prior year's level. The majority of the revenue
growth was reported in the Company's Oilfield operations, impacted by increased
worldwide drilling activity and, to a lesser extent, revenues from acquired
operations. Excluding incremental revenues from acquired operations, base
business revenues grew 10 percent over the prior year as demand for the
Company's products and services was impacted by increased North American
drilling activity as well as customer spending and new contract awards in
markets outside the United States and Canada.

          Gross profit was $1.1 billion, 17 percent above the prior year period.
The increase in gross profit reflects higher sales volumes associated with the
increased worldwide activity levels. Gross profit margins for the year were 30
percent of revenues, one percentage point above the gross profit margins
reported in the prior year. The gross margin improvement was primarily impacted
by an increased proportion of Oilfield segment sales, which traditionally
generate higher gross profit margins than the Distribution segment. To a lesser
extent, a favorable shift in the product mix towards higher-margin products,
including drill bits and premium drilling fluids, contributed to the margin
expansion.

          Operating expenses, consisting of selling, general and administrative
expenses, increased $85.0 million from the amount reported in 2002. The majority
of the year-to-year increase was attributable to higher variable costs directly
associated with the improved business volumes, as well as increased investment
in people and infrastructure to support the expanding base business. To a lesser
extent, the operating expense variance was impacted by incremental expenses
associated with acquired operations. As a percentage of revenues, operating
expenses were comparable with the prior year.

          Net interest expense, which represents interest expense less interest
income, equaled $39.0 million in 2003. Net interest expense was relatively
consistent with the prior year amount as average debt levels were comparable
between the periods.

          The effective tax rate approximated 32 percent, which was above the 31
percent effective rate reported in the prior year, but below the U.S. statutory
rate. The effective tax rate was lower than the U.S. statutory rate due to the
impact of M-I SWACO's U.S. partnership earnings for which the minority partner
is directly responsible for its related income taxes. The Company properly
consolidates the pre-tax income related to the minority partner's share of U.S.
partnership earnings but excludes the related tax provision. The effective tax
rate increased one percentage point from the prior year due to a shift in the
geographic mix of pre-tax income toward higher rate jurisdictions and, to a
lesser extent, a lower proportion of M-I SWACO's U.S. partnership earnings.

          Minority interests reflect the portion of the results of
majority-owned operations which are applicable to the minority interest
partners. Minority interests totaled $71.8 million in 2003, a $13.8 million
increase from the prior year. The increase predominantly reflects the higher
profitability of the M-I SWACO joint venture during 2003.

          The cumulative effect of change in accounting principle included for
2003 represents the impact of the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations."


                                       19

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

General

          At December 31, 2004, cash and cash equivalents equaled $53.6 million.
During 2004, the Company generated $182.2 million of cash flows from operations,
which is $39.6 million above the amount reported in 2003. The improvement was
attributable to increased profitability levels experienced by the Company,
partially offset by higher working capital investment, particularly inventories,
associated with the continued increase in worldwide drilling activity.

          In 2004, cash flows used in investing activities totaled $163.1
million, consisting of amounts required to fund capital expenditures and, to a
lesser extent, acquisitions. The Company invested $90.8 million in property,
plant and equipment, net of cash proceeds arising from certain asset disposals.
Acquisition funding, which primarily related to the purchase of certain
operating assets from CanFish Services and the specialty chemical assets of
Fortum Oil and Gas OY, resulted in cash outflows of $72.4 million in 2004.
Projected net capital expenditures for 2005 are expected to approximate $115.0
million, as higher drilling activity and an expanding business base impact the
level of investment in manufacturing and rental tool equipment. Capital spending
in 2005 is expected to primarily consist of spending for routine additions of
property and equipment to support the Company's operations and maintenance of
the Company's capital equipment base.

          Cash flows used in financing activities totaled $17.0 million in 2004.
Operating cash flow was sufficient to fund investing activities; however amounts
required to finance repurchases under the Company's share buyback program
resulted in incremental borrowings under existing credit facilities.

          The Company's primary internal source of liquidity is cash flow
generated from operations. Cash flow generated by operations is primarily
influenced by the level of worldwide drilling activity, which affects
profitability levels and working capital requirements. Capacity under revolving
credit agreements is also available, if necessary, to fund operating or
investing activities. As of December 31, 2004, the Company had $315.5 million of
capacity available under its U.S revolving credit facilities for future
operating or investing needs. Although the facility expires in July 2005, the
Company plans to re-negotiate a new agreement during the second quarter of 2005.
The Company also has revolving credit facilities in place outside of the United
States, which are generally used to finance local operating needs. At year-end,
the Company had available borrowing capacity of $56.3 million under the non-U.S.
borrowing facilities.

          The Company's external sources of liquidity include debt and equity
financing in the public capital markets, if needed. The Company carries an
investment-grade credit rating with recognized rating agencies, generally
providing the Company with access to debt markets. The Company's overall
borrowing capacity is, in part, dependent on maintaining compliance with
financial covenants under the various credit agreements. As of year-end, the
Company was well within the covenant compliance thresholds under its various
loan indentures, as amended, providing the ability to access available borrowing
capacity. Management believes funds generated by operations, amounts available
under existing credit facilities and external sources of liquidity will be
sufficient to finance capital expenditures and working capital needs of the
existing operations for the foreseeable future.

          On February 2, 2005, the Company's Board of Directors approved a cash
dividend program for stockholders and declared a quarterly cash dividend of
$0.12 per share payable in April 2005. The projected annual payout of $48.5
million is expected to be funded with cash flows from operations and, if
necessary, amounts available under existing credit facilities. The level of
future dividend payments will be at the discretion of the Company's Board of
Directors and will depend upon the Company's financial condition, earnings, cash
flows, compliance with certain debt covenants and other relevant factors.

          Management continues to evaluate opportunities to acquire products or
businesses complementary to the Company's operations. Additional acquisitions,
if they arise, may involve the use of cash or, depending upon the size and terms
of the acquisition, may require debt or equity financing.

          The Company has previously announced the signing of a non-binding
letter of intent related to the sale of Wilson Industries, Inc. ("Wilson") to CE
Franklin Ltd., a publicly-traded entity in which the Company currently owns 55
percent of the outstanding common stock. The potential transaction is structured
as a sale of shares of Wilson in exchange for additional shares of CE Franklin.
Accordingly, the transaction would not be expected to have an impact on the
Company's liquidity before certain stock sale restrictions lapse, which is
expected to occur in the fourth quarter of 2005. In the event the transaction is
ultimately consummated, no material book gain or loss is expected to be realized
on the sale. The Company, however, has agreed to fund certain of CE Franklin's
transaction-related costs, primarily professional fees, which are expected to be
immaterial. And, depending on the final terms of the transaction, the Company
may be required to record a tax provision on the sale which could be


                                       20

<PAGE>

material in relation to the quarterly tax provision, negatively impacting the
recorded provision and effective tax rate in the period the transaction is
consummated.

          The Company has not engaged in off-balance sheet financing
arrangements through special purpose entities, and the consolidation of the
Company's minority ownership positions would not result in an increase in
reported leverage ratios. The Company has no contractual arrangements in place
that could result in the issuance of additional shares of the Company's common
stock at a future date other than the Company's stock option program, which is
discussed in Note 1, "Summary of Significant Accounting Policies," and Note 15,
"Long-Term Incentive Compensation."

          The Company believes that it has sufficient existing manufacturing
capacity to meet current demand for its products and services. Additionally,
although inflation has not had a material effect on the Company in the three
most recent fiscal years, the Company has experienced increases in freight
costs, steel and other commodity prices during 2004. These costs, however, do
not have a significant influence on the Company's overall cost structure and the
Company has generally been able to offset most of these costs through
productivity gains and price increases.

Contractual Obligations, Commitments and Contingencies

Contractual Obligations

          The following table summarizes the Company's debt maturities and
future minimum payments under non-cancelable operating leases having initial
terms in excess of one year as of December 31, 2004 (in thousands):

<TABLE>
<CAPTION>
                                            Amount of Commitment Expiration per Period
                                            ------------------------------------------
                                            Less than      1-3       3-5     More than
                                   Total      1 year      years     years     5 years
                                 --------   ---------   --------   -------   ---------
<S>                              <C>        <C>         <C>        <C>       <C>
Debt maturities...............   $599,173    $211,375   $167,868   $    21    $219,909
Operating lease commitments...    176,183      43,263     57,034    28,691      47,195
                                 --------    --------   --------   -------    --------
Total.........................   $775,356    $254,638   $224,902   $28,712    $267,104
                                 ========    ========   ========   =======    ========
</TABLE>

          In the normal course of business, the Company enters into lease
agreements with cancellation provisions as well as agreements with initial terms
of less than one year. The costs related to these leases have been reflected in
rent expense, which totaled $94.8 million in 2004, but have been appropriately
excluded from the future minimum payments presented in the table above. Amounts
related to commitments under capital lease agreements, as well as pension and
other postretirement obligations, were immaterial for the periods presented.

Standby Letters of Credit and Guarantees

          In the normal course of business with customers, vendors and others,
the Company is contingently liable for performance under standby letters of
credit and bid, performance and surety bonds. Certain of these outstanding
instruments guarantee payment to insurance companies which reinsure certain
liability coverages of the Company's insurance captive. Excluding the impact of
these instruments, for which $15.5 million of related liabilities are reflected
in the accompanying consolidated balance sheet, the Company is contingently
liable for approximately $65.4 million of standby letters of credit and bid,
performance and surety bonds at December 31, 2004. Management does not expect
any material amounts to be drawn on these instruments.

          During the fourth quarter of 2004, the Company obtained a surety bond
in the amount of $43.5 million in connection with its appeal of the patent
infringement litigation discussed below. After taking into consideration amounts
reflected in the accompanying consolidated balance sheet, the Company has a
contingent liability of up to $18.2 million associated with this instrument.
Management, however, does not expect any amounts to be drawn on this instrument.

          The Company has also provided loan guarantees related to certain joint
ventures accounted for under the equity method of accounting. As the net assets
and cash flows of these entities are available to satisfy obligations as they
become due, management believes the likelihood is remote that the Company will
be required to perform under these guarantees. The Company's estimated maximum
exposure under these loan guarantees approximated $20.8 million as of December
31, 2004.


                                       21

<PAGE>

Insurance

          The Company maintains insurance coverage for various aspects of its
business and operations. The Company has elected to retain a portion of losses
that occur through the use of deductibles and retentions under its insurance
programs. Amounts in excess of the self-insured retention levels are fully
insured to limits believed appropriate for the Company's operations.
Self-insurance accruals are based on claims filed and an estimate for claims
incurred but not reported. While management believes that amounts accrued in the
accompanying consolidated financial statements are adequate for expected
liabilities arising from the Company's portion of losses, estimates of these
liabilities may change as circumstances develop.

Litigation

Halliburton Energy Services, Inc. v. Smith International, Inc.

          In September 2002, the Company was served with a complaint in the U.S.
District Court for the Eastern District of Texas, Sherman Division entitled
Halliburton Energy Services, Inc. v. Smith International, Inc. This lawsuit is a
patent infringement claim alleging that certain roller cone drill bits made by
the Company infringe several U.S. patents owned by Halliburton.

          The case was tried in the second quarter of 2004 and ultimately the
plaintiff was awarded $41.1 million, which includes the original jury assessment
of $24 million, a subsequent award enhancement, attorney's fees and prejudgment
interest. The Company filed a notice of appeal in the fourth quarter of 2004,
and a ruling from the appellate court is not anticipated until the first quarter
of 2006.

          Prior to the trial of the U.S. case, various infringement actions and
revocation proceedings in the U.K. were consolidated in the Patents Court of the
High Court of Justice of England and Wales. This consolidated proceeding is
essentially a U.K. counterpart to the U.S. patent action mentioned above. The
case went to trial in January 2005, and a ruling from the court is not
anticipated until the second quarter of 2005. The Company is defending the
allegations and seeking to invalidate the patents involved. Furthermore, outside
counsel has advised the Company that any damages that could potentially be shown
by the plaintiff in the U.K. case have already been satisfied in the U.S. patent
action mentioned above.

          Although an appeal is underway related to the U.S. case, the Company
is continuing to pursue other options, including possible settlement of related
claims outstanding. Based on the facts and circumstances and the opinion of
outside counsel, management believes that the amounts recognized by the Company
reflect the best estimate of its potential loss exposure.

Rose Dove Egle v. John M. Egle, et al.

          In April 1997, the Company acquired all of the equity interests in
Tri-Tech Fishing Services, L.L.C. ("Tri-Tech") in exchange for cash
consideration of approximately $20.4 million (the "Transaction").

          In August 1998, the Company was added as a defendant in a First
Amended Petition filed in the 15th Judicial District Court, Parish of Lafayette,
Louisiana entitled Rose Dove Egle v. John M. Egle, et al. In the amended
petition, the plaintiffs alleged that, due to an improper conveyance of
ownership interest by the Tri-Tech majority partner prior to the Transaction,
Smith purchased a portion of its equity interest from individuals who were not
legally entitled to their Tri-Tech shares. The suit was tried in the first
quarter of 2004, and a jury verdict of approximately $4.8 million was rendered
in favor of the plaintiffs. The Company has initiated the appeal process and
does not anticipate a ruling from the appellate court until the first quarter of
2006. Based upon the facts and circumstances and the opinion of outside legal
counsel, management believes that an unfavorable outcome on this matter is not
probable at this time. Accordingly, the Company has not recognized a loss
provision in the accompanying consolidated financial statements.

Other

          The Company is a defendant in various other legal proceedings arising
in the ordinary course of business. In the opinion of management, these matters
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.


                                       22

<PAGE>

Environmental

          The Company routinely establishes and reviews the adequacy of reserves
for estimated future environmental clean-up costs for properties currently or
previously operated by the Company.

          In connection with most business acquisitions, the Company obtains
contractual indemnifications from the seller related to environmental matters.
These indemnifications generally provide for the reimbursement of environmental
clean-up costs incurred by the Company for events occurring or circumstances
existing prior to the purchase date, whether the event or circumstance was known
or unknown at that time. A substantial portion of the Company's total
environmental exposure is associated with its M-I SWACO operations, which are
subject to various indemnifications from former owners.

          As of December 31, 2004, the Company's environmental reserve totaled
$9.0 million. This amount reflects the future undiscounted estimated exposure
related to identified properties, without regard to indemnifications from former
owners. While actual future environmental costs may differ from estimated
liabilities recorded at December 31, 2004, the Company does not believe that
these differences will have a material impact on the Company's financial
position or results of operations, subject to the indemnifications in place.

          During 2003, the Company took legal action against M-I SWACO's former
owners to clarify certain contractual provisions of the environmental
indemnification upon which approximately $8.3 million of remediation costs
properly incurred under the indemnification remains unpaid. This matter is
expected to go to trial during the second quarter of 2005. In the event that (i)
M-I SWACO's former owners and other parties to indemnification agreements with
the Company do not fulfill their obligations, and (ii) costs incurred to
remediate the identified properties reach estimated maximum exposure limits, the
Company would be required to record an additional charge of up to $25.0 million,
impacting earnings and cash flows in future periods.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

          The discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. The Company evaluates its estimates on an on-going
basis, based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.

          The Company believes the following describes significant judgments and
estimates used in the preparation of its consolidated financial statements:

     Allowance for doubtful accounts. The Company extends credit to customers
     and other parties in the normal course of business. Management regularly
     reviews outstanding receivables and provides for estimated losses through
     an allowance for doubtful accounts. In evaluating the level of established
     reserves, management makes judgments regarding the parties' ability to make
     required payments, economic events and other factors. As the financial
     condition of these parties change, circumstances develop or additional
     information becomes available, adjustments to the allowance for doubtful
     accounts may be required.

     Inventory reserves. The Company has made significant investments in
     inventory to service its customers around the world. On a routine basis,
     the Company uses judgments in determining the level of reserves required to
     state inventory at the lower of cost or market. Management's estimates are
     primarily influenced by technological innovations, market activity levels
     and the physical condition of products. Changes in these or other factors
     may result in adjustments to the carrying value of inventory.

     Goodwill. The Company has acquired a number of operations during the past
     decade, which has resulted in the recording of a material amount of
     goodwill. Under SFAS No. 142, "Goodwill and Other Intangible Assets," the
     Company is required to perform an annual goodwill impairment evaluation,
     which is largely influenced by future cash flow projections. Estimating
     future cash flows of the Company's operations requires management to make
     judgments about future operating results and working capital requirements.
     Although the majority of the goodwill relates to the Company's Oilfield
     operations, $37.8 million of goodwill relates to Distribution transactions.
     Changes in cash flow


                                       23

<PAGE>

     assumptions or other factors which negatively impact the fair value of the
     operations would influence the evaluation and may result in the
     determination that a portion of the goodwill is impaired when the annual
     analysis is performed.

     Self-Insurance. The Company maintains insurance coverage for various
     aspects of its business and operations. The Company retains a portion of
     losses that occur through the use of deductibles and retentions under
     self-insurance programs. Management regularly reviews estimates of reported
     and unreported claims and provides for losses through insurance reserves.
     As claims develop and additional information becomes available, adjustments
     to loss reserves may be required.

     Income taxes. Deferred tax assets and liabilities are recognized for
     differences between the book basis and tax basis of the net assets of the
     Company. In providing for deferred taxes, management considers current tax
     regulations, estimates of future taxable income and available tax planning
     strategies. In certain cases, management has established reserves to reduce
     deferred tax assets to estimated realizable value. If tax regulations,
     operating results or the ability to implement tax planning strategies vary,
     adjustments to the carrying value of deferred tax assets and liabilities
     may be required.

     Environmental Obligations. The Company records liabilities for
     environmental obligations when remedial efforts are probable and the costs
     can be reasonably estimated. Management's estimates are based on currently
     enacted laws and regulations. As more information becomes available or
     environmental laws and regulations change, such liabilities may be required
     to be adjusted. Additionally, in connection with acquisitions, the Company
     generally obtains indemnifications from the seller related to environmental
     matters. If the indemnifying parties do not fulfill their obligations,
     adjustments of recorded amounts may be required.

RECENT ACCOUNTING PRONOUNCEMENTS

          In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123r")
which replaces Statement No. 123 and supersedes Accounting Principles Board
Opinion No. 25. SFAS No. 123r addresses the financial accounting and reporting
of share-based payments to employees, including grants of stock options. SFAS
No. 123r requires the recognition of compensation expense, which is measured
based on the grant date fair value of equity awards, generally over the vesting
period of the related stock option. The Company expects to adopt SFAS No. 123r
effective July 1, 2005 and is evaluating the alternative transition methods
allowed by the statement, including the modified prospective and limited
modified retrospective methods. Under the modified prospective method,
compensation cost related to all unvested stock options is recognized beginning
with the effective date; however, the limited modified retrospective method
permits restatement of prior periods assuming adoption of SFAS No 123r as of
January 1, 2005. Although the Company continues to evaluate the standard and
related transition matters, based on equity awards granted to employees through
December 31, 2004 and those expected to be granted during the second quarter of
2005, share-based compensation expense on a full year basis is expected to total
approximately $12.0 million, net of tax.

          From time to time, new accounting pronouncements are issued by the
FASB which are adopted by the Company as of the specified effective date. Unless
otherwise discussed, management believes the impact of recently issued
standards, which are not yet effective, will not have a material impact on the
Company's consolidated financial statements upon adoption.


                                       24

<PAGE>

ITEM 7A. QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES

          The Company is exposed to market risks from changes in interest rates
and foreign exchange rates and enters into various hedging transactions to
mitigate these risks. The Company does not use financial instruments for trading
or speculative purposes. See Note 10, "Financial Instruments," for additional
discussion of hedging instruments.

          The Company's exposure to interest rate changes is managed through the
use of a combination of fixed and floating rate debt and by entering into
interest rate contracts, from time to time, on a portion of its long-term
borrowings. The Company had no interest rate contracts outstanding as of
December 31, 2004 and 2003. At December 31, 2004, 19 percent of the Company's
long-term debt carried a variable interest rate. Management believes that
significant interest rate changes will not have a material near-term impact on
the Company's future earnings or cash flows.

          The Company's exposure to changes in foreign exchange rates is managed
primarily through the use of forward exchange contracts. These contracts
increase or decrease in value as foreign exchange rates change, to protect the
value of the underlying transactions denominated in foreign currencies. All
currency contracts are components of the Company's hedging program and are
entered into for the sole purpose of hedging an existing or anticipated currency
exposure. The gains and losses on these contracts offset changes in the value of
the related exposures. The terms of these contracts generally do not exceed two
years. As of December 31, 2004, the notional amount of fair value hedge
contracts outstanding was $97.2 million, approximating the fair value of these
contracts. As of December 31, 2003, the notional amounts of fair value hedge
contracts and cash flow hedge contracts outstanding were $45.5 million and $9.2
million, respectively, and the fair value exceeded the notional amount of these
contracts by $1.9 million. In some areas, where hedging is not cost effective,
the Company addresses foreign currency exposure utilizing working capital
management.

          The Company utilizes a "Value-at-Risk" ("VAR") model to determine the
maximum potential one-day loss in the fair value of its foreign exchange
sensitive financial instruments. The VAR model estimates were made assuming
normal market conditions and a 95 percent confidence level. The Company's VAR
computations are based on the historical price movements in various currencies
(a "historical" simulation) during the year. The model includes all of the
Company's foreign exchange derivative contracts. Anticipated transactions, firm
commitments and assets and liabilities denominated in foreign currencies, which
certain of these instruments are intended to hedge, were excluded from the
model. The VAR model is a risk analysis tool and does not purport to represent
actual losses in fair value that will be incurred by the Company, nor does it
consider the potential effect of favorable changes in market factors. The
estimated maximum potential one-day loss in fair value of currency sensitive
instruments, calculated using the VAR model, was not material to the Company's
financial position or results of operations.


                                       25

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining
effective internal control over financial reporting as defined in Rule 13a -
15(f) under the Securities Exchange Act of 1934. The Company's internal control
over financial reporting is designed to provide reasonable, not absolute,
assurance to the Company's management and board of directors regarding the
preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable, not absolute, assurance
with respect to financial statement preparation and presentation.

The Company's management assessed the effectiveness of the Company's internal
control over financial reporting based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that the Company's internal control over financial reporting was
effective as of December 31, 2004.

Management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, the
independent registered public accounting firm who also audited the Company's
consolidated financial statements. The Deloitte & Touche LLP attestation report
on management's assessment of the Company's internal control over financial
reporting appears on page 27 of this Annual Report on Form 10-K.

<TABLE>
<S>                                     <C>                             <C>


/s/ DOUG ROCK                           /s/ LOREN K. CARROLL            /s/ MARGARET K. DORMAN
---------------------------             ------------------------        -----------------------
Doug Rock                               Loren K. Carroll                Margaret K. Dorman
Chairman of the Board and               Executive Vice President        Senior Vice President,
Chief Executive Officer                                                 Chief Financial Officer
                                                                        and Treasurer
</TABLE>


                                       26

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Smith International, Inc.:

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Smith
International, Inc. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2004 of the Company and our
report dated March 14, 2005 expressed an unqualified opinion on those financial
statements.


DELOITTE & TOUCHE LLP

Houston, Texas
March 14, 2005


                                       27

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Smith International, Inc.:

We have audited the accompanying consolidated balance sheets of Smith
International, Inc. and subsidiaries (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of operations, stockholders'
equity, and comprehensive income, and cash flows for each of the three years in
the period ended December 31, 2004. Our audits also included the financial
statement schedule listed in Part IV, Item 15 (a) (2). These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Smith International, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 14, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.

As discussed in Note 3 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" in 2003.


DELOITTE & TOUCHE LLP

Houston, Texas
March 14, 2005


                                       28

<PAGE>

                            SMITH INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except par value data)

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                       -----------------------
                                                                                          2004         2003
                                                                                       ----------   ----------
<S>                                                                                    <C>          <C>
                                     ASSETS
CURRENT ASSETS:
   Cash and cash equivalents .......................................................   $   53,596   $   51,286
   Receivables, net (Note 1) .......................................................      963,622      801,819
   Inventories, net ................................................................      890,462      739,627
   Deferred tax assets, net ........................................................       47,083       31,238
   Prepaid expenses and other ......................................................       64,869       55,826
                                                                                       ----------   ----------
      Total current assets .........................................................    2,019,632    1,679,796
                                                                                       ----------   ----------

PROPERTY, PLANT AND EQUIPMENT, NET .................................................      576,954      534,871

GOODWILL, NET ......................................................................      713,353      690,593

OTHER INTANGIBLE ASSETS, NET .......................................................       68,597       65,179

OTHER ASSETS .......................................................................      128,242      126,608
                                                                                       ----------   ----------
TOTAL ASSETS .......................................................................   $3,506,778   $3,097,047
                                                                                       ==========   ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Short-term borrowings and current portion of long-term debt .....................   $  211,375   $   89,747
   Accounts payable ................................................................      376,782      310,754
   Accrued payroll costs ...........................................................       89,200       73,723
   Income taxes payable ............................................................       91,587       69,301
   Other ...........................................................................      118,413       87,399
                                                                                       ----------   ----------
      Total current liabilities ....................................................      887,357      630,924
                                                                                       ----------   ----------

LONG-TERM DEBT .....................................................................      387,798      488,548

DEFERRED TAX LIABILITIES ...........................................................       93,777       80,065

OTHER LONG-TERM LIABILITIES ........................................................       82,352       74,066

MINORITY INTERESTS .................................................................      654,683      587,668

COMMITMENTS AND CONTINGENCIES (Note 17)

STOCKHOLDERS' EQUITY:
   Preferred stock, $1 par value; 5,000 shares authorized; no shares
      issued or outstanding in 2004 or 2003 ........................................           --           --
   Common stock, $1 par value; 150,000 shares authorized; 105,297 shares
      issued in 2004 (102,720 shares issued in 2003) ...............................      105,297      102,720
   Additional paid-in capital ......................................................      432,395      371,438
   Retained earnings ...............................................................      961,574      779,123
   Accumulated other comprehensive income ..........................................       24,404       11,625
   Less - Treasury securities, at cost; 4,222 common shares in 2004
      (2,384 common shares in 2003) ................................................     (122,859)     (29,130)
                                                                                       ----------   ----------
      Total stockholders' equity ...................................................    1,400,811    1,235,776
                                                                                       ----------   ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .........................................   $3,506,778   $3,097,047
                                                                                       ==========   ==========
</TABLE>

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


                                       29

<PAGE>

                            SMITH INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                             ------------------------------------
                                                                2004         2003         2002
                                                             ----------   ----------   ----------
<S>                                                          <C>          <C>          <C>
Revenues .................................................   $4,419,015   $3,594,828   $3,170,080

Costs and expenses:
   Costs of revenues .....................................    3,067,076    2,518,897    2,251,778
   Selling expenses ......................................      685,272      586,163      520,509
   General and administrative expenses ...................      227,903      161,021      141,645
                                                             ----------   ----------   ----------
      Total costs and expenses ...........................    3,980,251    3,266,081    2,913,932
                                                             ----------   ----------   ----------

Operating income .........................................      438,764      328,747      256,148

Interest expense .........................................       38,762       40,964       40,928
Interest income ..........................................       (1,300)      (1,973)      (2,579)
                                                             ----------   ----------   ----------
Income before income taxes, minority interests and
   cumulative  effect of change in accounting
   principle .............................................      401,302      289,756      217,799

Income tax provision .....................................      129,721       93,334       66,632

Minority interests .......................................       89,130       71,788       57,978
                                                             ----------   ----------   ----------

Income before cumulative effect of change in
   accounting principle ..................................      182,451      124,634       93,189
Cumulative effect of change in accounting principle,
   net of tax and minority interests .....................           --       (1,154)          --
                                                             ----------   ----------   ----------
Net income ...............................................   $  182,451   $  123,480   $   93,189
                                                             ==========   ==========   ==========

Basic:
   Earnings per share before cumulative effect of
      change in accounting principle .....................   $     1.80   $     1.25   $     0.94
   Cumulative effect of change in accounting principle,
      net of tax and minority interests ..................           --        (0.01)          --
                                                             ----------   ----------   ----------
   Earnings per share ....................................   $     1.80   $     1.24   $     0.94
                                                             ==========   ==========   ==========

Diluted:
   Earnings per share before cumulative effect of
      change in accounting principle .....................   $     1.78   $     1.24   $     0.93
   Cumulative effect of change in accounting principle,
      net of tax and minority interests ..................           --        (0.01)          --
                                                             ----------   ----------   ----------
   Earnings per share ....................................   $     1.78   $     1.23   $     0.93
                                                             ==========   ==========   ==========

Weighted average shares outstanding:
   Basic .................................................      101,332       99,815       98,984
   Diluted ...............................................      102,569      100,903      100,091
</TABLE>

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


                                       30

<PAGE>

                            SMITH INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                                               ---------------------------------
                                                                                  2004        2003        2002
                                                                               ---------   ---------   ---------
<S>                                                                            <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income ..............................................................   $ 182,451   $ 123,480   $  93,189
   Adjustments to reconcile net income to net cash provided by operating
      activities, excluding the net effects of acquisitions:
      Depreciation and amortization ........................................     106,493     101,709      89,327
      Minority interests ...................................................      89,130      71,788      57,978
      Deferred income tax provision (benefit) ..............................      (1,764)      8,154      23,560
      Provision for losses on receivables ..................................       3,846       3,835       9,593
      Increase in LIFO inventory reserves ..................................      28,177         231         439
      Gain on disposal of property, plant and equipment ....................     (10,592)     (8,463)     (4,645)
      Foreign currency translation losses (gains) ..........................       1,790       1,516        (864)
      Cumulative effect of change in accounting principle ..................          --       1,154          --
      Litigation-related charge ............................................      31,439          --          --
   Changes in operating assets and liabilities:
      Receivables ..........................................................    (153,066)   (161,205)    119,600
      Inventories ..........................................................    (167,879)    (90,167)     33,675
      Accounts payable .....................................................      61,669      49,452     (32,817)
      Other current assets and liabilities .................................      21,937      46,001     (48,339)
      Other non-current assets and liabilities .............................     (11,457)     (4,903)    (17,170)
                                                                               ---------   ---------   ---------
         Net cash provided by operating activities .........................     182,174     142,582     323,526
                                                                               ---------   ---------   ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Acquisitions, net of cash acquired ...................................     (72,350)   (101,789)    (60,152)
      Purchases of property, plant and equipment ...........................    (111,449)    (98,923)    (97,051)
      Proceeds from disposal of property, plant and equipment ..............      20,679      22,902      18,247
      Other ................................................................          --          --        (231)
                                                                               ---------   ---------   ---------
         Net cash used in investing activities .............................    (163,120)   (177,810)   (139,187)
                                                                               ---------   ---------   ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from issuance of long-term debt .............................      68,858     116,615      15,902
      Principal payments of long-term debt .................................     (85,832)   (135,499)   (130,775)
      Net change in short-term borrowings ..................................      54,114       2,014      (1,170)
      Purchases of treasury stock ..........................................     (92,002)         --          --
      Proceeds from employee stock option exercises ........................      61,016      18,958       5,047
      Distributions to minority interest partner ...........................     (23,200)     (4,000)    (31,600)
                                                                               ---------   ---------   ---------
         Net cash used in financing activities .............................     (17,046)     (1,912)   (142,596)
                                                                               ---------   ---------   ---------
   Effect of exchange rate changes on cash .................................         302       1,676         324
                                                                               ---------   ---------   ---------
   Increase (decrease) in cash and cash equivalents ........................       2,310     (35,464)     42,067
   Cash and cash equivalents at beginning of year ..........................      51,286      86,750      44,683
                                                                               ---------   ---------   ---------
   Cash and cash equivalents at end of year ................................   $  53,596   $  51,286   $  86,750
                                                                               =========   =========   =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid for interest ..................................................   $  38,158   $  41,306   $  41,150
   Cash paid for income taxes ..............................................     111,568      50,980      39,743
</TABLE>

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


                                       31

<PAGE>

                            SMITH INTERNATIONAL, INC.
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                 COMMON STOCK                                 ACCUMULATED
                                                            ----------------------   ADDITIONAL                  OTHER
                                                             NUMBER OF                 PAID-IN    RETAINED   COMPREHENSIVE
                                                               SHARES      AMOUNT      CAPITAL    EARNINGS       INCOME
                                                            -----------   --------   ----------   --------   -------------
<S>                                                         <C>           <C>        <C>          <C>        <C>
Balance, January 1, 2002 ................................    50,593,930   $ 50,594    $389,989    $562,454     $(24,748)
   Comprehensive income:
      Net income ........................................            --         --          --      93,189           --
      Currency translation adjustments ..................            --         --          --          --       13,597
      Changes in unrealized fair value of derivatives ...            --         --          --          --        3,266
      Minimum pension liability adjustments .............            --         --          --          --       (2,550)
                                                            -----------   --------    --------    --------     --------
Comprehensive income ....................................            --         --          --      93,189       14,313
Exercise of stock options and stock grants ..............       276,993        277       6,597          --           --
Two-for-one common stock split (Note 12) ................    50,675,019     50,675     (50,675)         --           --
                                                            -----------   --------    --------    --------     --------
Balance, December 31, 2002 ..............................   101,545,942    101,546     345,911     655,643      (10,435)
   Comprehensive income:
      Net income ........................................            --         --          --     123,480           --
      Currency translation adjustments ..................            --         --          --          --       22,073
      Changes in unrealized fair value of derivatives ...            --         --          --          --           36
      Minimum pension liability adjustments .............            --         --          --          --          (49)
                                                            -----------   --------    --------    --------     --------
Comprehensive income ....................................            --         --          --     123,480       22,060
Exercise of stock options and stock grants ..............     1,174,364      1,174      25,527          --           --
                                                            -----------   --------    --------    --------     --------
Balance, December 31, 2003 ..............................   102,720,306    102,720     371,438     779,123       11,625
   Comprehensive income:
      Net income ........................................            --         --          --     182,451           --
      Currency translation adjustments ..................            --         --          --          --       14,963
      Changes in unrealized fair value of derivatives ...            --         --          --          --       (2,471)
   Minimum pension liability adjustments ................            --         --          --          --          287
                                                            -----------   --------    --------    --------     --------
Comprehensive income ....................................            --         --          --     182,451       12,779
Purchases of treasury stock .............................            --         --          --          --           --
Exercise of stock options and stock grants ..............     2,576,347      2,577      60,957          --           --
                                                            -----------   --------    --------    --------     --------
Balance, December 31, 2004 ..............................   105,296,653   $105,297    $432,395    $961,574     $ 24,404
                                                            ===========   ========    ========    ========     ========

<CAPTION>
                                                              TREASURY SECURITIES
                                                            ----------------------
                                                                 COMMON STOCK
                                                            ----------------------       TOTAL
                                                             NUMBER OF               STOCKHOLDERS'
                                                              SHARES       AMOUNT        EQUITY
                                                            ----------   ---------   -------------
<S>                                                         <C>          <C>         <C>
Balance, January 1, 2002 ................................   (1,192,054)  $ (29,130)   $  949,159
   Comprehensive income:
      Net income ........................................           --          --        93,189
      Currency translation adjustments ..................           --          --        13,597
      Changes in unrealized fair value of derivatives ...           --          --         3,266
      Minimum pension liability adjustments .............           --          --        (2,550)
                                                            ----------   ---------    ----------
Comprehensive income ....................................           --          --       107,502
Exercise of stock options and stock grants ..............           --          --         6,874
Two-for-one common stock split (Note 12) ................   (1,192,054)         --            --
                                                            ----------   ---------    ----------
Balance, December 31, 2002 ..............................   (2,384,108)    (29,130)    1,063,535
   Comprehensive income:
      Net income ........................................           --          --       123,480
      Currency translation adjustments ..................           --          --        22,073
      Changes in unrealized fair value of derivatives ...           --          --            36
      Minimum pension liability adjustments .............           --          --           (49)
                                                            ----------   ---------    ----------
Comprehensive income ....................................           --          --       145,540
Exercise of stock options and stock grants ..............           --          --        26,701
                                                            ----------   ---------    ----------
Balance, December 31, 2003 ..............................   (2,384,108)    (29,130)    1,235,776
   Comprehensive income:
      Net income ........................................           --          --       182,451
      Currency translation adjustments ..................           --          --        14,963
      Changes in unrealized fair value of derivatives ...           --          --        (2,471)
   Minimum pension liability adjustments ................           --          --           287
                                                            ----------   ---------    ----------
Comprehensive income ....................................           --          --       195,230
Purchases of treasury stock .............................   (1,807,600)    (92,002)      (92,002)
Exercise of stock options and stock grants ..............      (30,758)     (1,727)       61,807
                                                            ----------   ---------    ----------
Balance, December 31, 2004 ..............................   (4,222,466)  $(122,859)   $1,400,811
                                                            ==========   =========    ==========
</TABLE>

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


                                       32

<PAGE>

                            SMITH INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     (All dollar amounts are expressed in thousands, unless otherwise noted)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

          Smith International, Inc. ("Smith" or the "Company") provides premium
products and services to the oil and gas exploration and production industry,
the petrochemical industry and other industrial markets. The accompanying
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States and all applicable financial
statement rules and regulations of the Securities and Exchange Commission (the
"Commission"). Management believes the consolidated financial statements present
fairly the financial position, results of operations and cash flows of the
Company as of the dates indicated.

          The consolidated financial statements include the accounts of the
Company and all wholly and majority-owned subsidiaries, after the elimination of
all significant intercompany accounts and transactions. Investments in
affiliates in which ownership interest ranges from 20 to 50 percent, and the
Company exercises significant influence over operating and financial policies,
are accounted for on the equity method. All other investments are carried at
cost, which does not exceed the estimated net realizable value of such
investments.

          Certain reclassifications have been made to the prior years' financial
information to conform to the 2004 presentation.

Use of Estimates

          Preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosed amounts of contingent assets and liabilities and the
reported amounts of revenues and expenses. Management believes the most
significant estimates and assumptions are associated with the valuation of
accounts receivable, inventories, goodwill and deferred taxes as well as the
determination of liabilities related to environmental obligations and
self-insurance programs. If the underlying estimates and assumptions, upon which
the financial statements are based, change in future periods, actual amounts may
differ from those included in the accompanying consolidated financial
statements.

Cash and Cash Equivalents

          The Company considers all highly liquid financial instruments
purchased with an original maturity of three months or less to be cash
equivalents.

Allowance for Doubtful Accounts

          The Company maintains an allowance for doubtful accounts to provide
for receivables which may ultimately be uncollectible. Reserves are determined
in light of a number of factors including customer specific conditions, economic
events and the Company's historical loss experience. At December 31, 2004 and
2003, the allowance for doubtful accounts was $12.6 million and $12.1 million,
respectively.

Inventories

          Inventories are stated at the lower of cost or market. Cost is
determined using the average cost method for the majority of the Company's
inventories; however, certain of the Company's U.S.-based inventories are valued
utilizing the last-in, first-out ("LIFO") method. Inventory costs consist of
materials, labor and factory overhead.


                                       33

<PAGE>

Fixed Assets

          Fixed assets, consisting of rental equipment and property, plant and
equipment, are stated at cost, net of accumulated depreciation. The Company
computes depreciation on fixed assets using principally the straight-line
method; however, for income tax purposes, accelerated methods of depreciation
are used. The estimated useful lives used in computing depreciation generally
range from 20 to 40 years for buildings, three to 25 years for machinery and
equipment, and five to ten years for rental equipment. Leasehold improvements
are amortized over the initial lease term or the estimated useful lives of the
improvements, whichever is shorter. Depreciation expense for the years ended
December 31, 2004, 2003 and 2002 was $96.9 million, $93.5 million and $84.7
million, respectively.

          Costs of major renewals and betterments are capitalized as fixed
assets; however, expenditures for maintenance, repairs and minor improvements
are charged to expense when incurred. When fixed assets are sold or retired, the
remaining cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in the consolidated
statement of operations.

Goodwill and Other Intangible Assets

          Goodwill represents the excess of cost over the fair value of net
assets acquired. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," recorded goodwill
balances are not amortized but, instead, are evaluated for impairment annually
or more frequently if circumstances indicate that an impairment may exist. The
goodwill valuation, which is prepared during the first quarter of each calendar
year, is largely influenced by projected future cash flows and, therefore, is
significantly impacted by estimates and judgments.

          The Company amortizes other identifiable intangible assets on a
straight-line basis over the periods expected to be benefited, ranging from
three to 27 years. The components of these other intangible assets, recorded in
other assets in the accompanying consolidated balance sheets generally consist
of patents, license agreements, non-compete agreements, trademarks and customer
lists and contracts.

Impairment of Long-Lived Assets

          Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If an evaluation is required, the estimated undiscounted future
cash flows associated with the asset will be compared to the asset's carrying
amount to determine if an impairment exists.

Environmental Obligations

          Expenditures for environmental obligations that relate to current
operations are expensed or capitalized, as appropriate. Liabilities are recorded
when environmental clean-up efforts are probable and their cost is reasonably
estimated, and are adjusted as further information is obtained. Such estimates
are based on currently enacted laws and regulations and are not discounted to
present value.

Liabilities Related to Self-Insurance Programs

          The Company is self-insured for certain casualty and employee medical
insurance liabilities of its U.S. operations. Expenditures for casualty and
medical claims are recorded when incurred after taking into consideration
recoveries available under stop-loss insurance policies. Additionally, reserves
are established to provide for the estimated cost of settling known claims as
well as medical and casualty exposures projected to have been incurred but not
yet reported.

Foreign Currency Translation and Transactions

          Gains and losses resulting from balance sheet translation of
operations outside the United States where the applicable foreign currency is
the functional currency are included as a component of accumulated other
comprehensive income within stockholders' equity. Gains and losses resulting
from balance sheet translation of operations outside the United States where the
U.S. dollar is the functional currency are included in the consolidated
statements of operations.

          Gains and losses resulting from foreign currency transactions,
excluding cash flow hedges discussed below, are recognized currently in the
consolidated statements of operations.


                                       34

<PAGE>

Financial Instruments

          The nature of the Company's business activities involves the
management of various financial and market risks, including those related to
changes in currency exchange rates and interest rates. The Company utilizes
derivative financial instruments such as foreign exchange contracts, foreign
exchange options and interest rate contracts to mitigate or eliminate certain of
those risks. The Company does not enter into derivative instruments for
speculative purposes.

          The Company records changes in fair market value related to fair value
hedges, which includes foreign exchange contracts, to general and administrative
expenses in the consolidated statements of operations. Changes in value related
to cash flow hedges, which includes foreign exchange contracts, foreign exchange
options and interest rate swaps, are recorded in accumulated other comprehensive
income and are recognized in the consolidated statement of operations when the
hedged item affects earnings.

Income Taxes

          The Company accounts for income taxes using an asset and liability
approach for financial accounting and income tax reporting based on enacted tax
rates. Deferred tax assets are reduced by a valuation allowance when it is more
likely than not that some portion, or all, of the deferred tax assets will not
be realized.

Revenue Recognition

          The Company's revenues, which are composed of product, rental, service
and other revenues, are generally subject to contractual arrangements which
specify price and general terms and conditions. The Company recognizes product
revenues, net of applicable provisions for returns, when title and the related
risk of loss transfers to the customer. Rental, service and other revenues are
recorded when such services are performed and collectibility is reasonably
assured.

Minority Interests

          The Company records minority interest expense which reflects the
portion of the earnings of majority-owned operations which are applicable to the
minority interest partners. The minority interest amount primarily represents
the share of the M-I SWACO profits associated with the minority partner's 40
percent interest in those operations. To a lesser extent, minority interests
include the portion of CE Franklin Ltd. and United Engineering Services LLC
earnings applicable to the respective minority shareholders.

Stock-Based Compensation

     Stock Options

          The Company's Board of Directors and its stockholders have authorized
a long-term incentive plan, which includes stock options. As of December 31,
2004, 3.6 million shares were issued and outstanding under the stock option
program and an additional 2.1 million shares were authorized for future
issuance. Options are generally granted at the fair market value on the date of
grant, vest over a four-year period and expire ten years after the date of
grant.

          Approximately 0.1 million options awarded in 2001 were granted at a
strike price more than five percent below the market value on the date of
issuance and, thus, do not meet the conditions necessary to qualify as a
non-compensatory option grant. Compensation expense related to these grants is
being recognized over the four-year vesting period and resulted in the inclusion
of $0.4 million, $0.4 million and $0.3 million of related expense in the
accompanying consolidated statements of operations for the years ended December
31, 2004, 2003 and 2002, respectively.

          Until the required adoption of SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123r") on July 1, 2005, the Company will
continue to apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock option program as allowed under SFAS No. 123 "Accounting for Stock-Based
Compensation." Therefore, for all options other than those mentioned above, the
Company elects to make pro forma disclosures versus recognizing the related
compensation expense in the accompanying consolidated financial statements.


                                       35

<PAGE>

          Had the Company elected to apply the accounting standards of SFAS No.
123, the Company's net income and earnings per share would have approximated the
pro forma amounts indicated below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                   2004       2003       2002
                                                                 --------   --------   -------
<S>                                                              <C>        <C>        <C>
Net income, as reported ......................................   $182,451   $123,480   $93,189
   Add: Stock-based compensation expense included in
      reported income, net of related tax effect .............        273        273       182
   Less: Total stock-based compensation expense determined
      under fair value methods, net of related tax effect ....    (11,296)   (10,838)   (8,985)
                                                                 --------   --------   -------
Net income, pro forma ........................................   $171,428   $112,915   $84,386
                                                                 ========   ========   =======

Earnings per share:
   As reported:
      Basic ..................................................   $   1.80   $   1.24   $  0.94
      Diluted ................................................       1.78       1.23      0.93

   Pro forma:
      Basic ..................................................   $   1.69   $   1.13   $  0.85
      Diluted ................................................       1.67       1.12      0.84
</TABLE>

     Restricted Stock

          In addition to stock option awards, the Company's long-term incentive
plan allows for the issuance of restricted stock and restricted stock units. In
December 2004, the Board of Directors approved the grant of performance-based
restricted stock units ("performance units"), subject to shareholder approval at
the 2005 annual meeting. Compensation expense related to the restricted share
awards, calculated as the difference between the market value on the date of
grant and the exercise price, is recognized over the vesting period.

          The restricted stock units generally vest ratably over a four-year
period. The performance units would vest over a three-year period and the number
of shares awarded would be adjusted based upon the return on equity level
attained by the Company during the fiscal year following the grant. The impact
on compensation expense related to the restricted units granted in December 2004
is reflected in the above table; however, the performance units have been
excluded as they have not been approved by the Company's stockholders.

Recent Accounting Pronouncements

          In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123r, which replaces Statement No. 123 and supersedes Accounting
Principles Board Opinion No. 25. SFAS No. 123r addresses the financial
accounting and reporting of share-based payments to employees, including grants
of stock options. SFAS No. 123r requires the recognition of compensation
expense, which is measured based on the grant date fair value of equity awards,
generally over the vesting period of the related stock option. The Company
expects to adopt SFAS No. 123r effective July 1, 2005 and is evaluating the
alternative transition methods allowed by the statement, including the modified
prospective and limited modified retrospective methods. Under the modified
prospective method, compensation cost related to all unvested stock options is
recognized beginning with the effective date; however, the limited modified
retrospective method permits restatement of prior periods assuming adoption of
SFAS No 123r as of January 1, 2005. Although the Company continues to evaluate
the standard and related transition matters, based on equity awards granted to
employees through December 31, 2004 and those expected to be granted during the
second quarter of 2005, share-based compensation expense on a full year basis is
expected to total approximately $12.0 million, net of tax.

          From time to time, new accounting pronouncements are issued by the
FASB which are adopted by the Company as of the specified effective date. Unless
otherwise discussed, management believes the impact of recently issued
standards, which are not yet effective, will not have a material impact on the
Company's consolidated financial statements upon adoption.


                                       36

<PAGE>

2.   LITIGATION-RELATED CHARGE

          During the second quarter of 2004, the Company recorded
litigation-related charges totaling $31.4 million, or $20.4 million on an
after-tax basis. The second quarter charge, which consists of an estimated loss
provision, legal fees and other directly related costs, results from a complaint
which alleged that certain of the Company's roller cone drill bit designs
infringed several of the plaintiff's U.S. patents. Approximately $28.8 million
of the charge is included in general and administrative expenses and the
remainder is recorded in costs of revenues. Accrued liabilities associated with
the litigation-related charge, which totaled $25.3 million as of December 31,
2004, are reflected in the accompanying consolidated balance sheet as other
current liabilities.

3.   CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING

          On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations," which addresses the financial accounting and
reporting for retirement obligations and costs associated with tangible
long-lived assets. SFAS No. 143 requires that liabilities for asset retirement
obligations be recognized during the periods incurred rather than when expended.
The Company's asset retirement obligations principally relate to the removal of
leasehold improvements upon exiting certain leased properties, primarily
associated with the M-I SWACO operations. Upon adoption, the Company recognized
a charge of $2.5 million, or $1.2 million after tax and minority interests, to
reflect the cumulative amount of expense which was required to be recognized as
of January 1, 2003. This amount has been recorded as a cumulative effect of
change in accounting principle in the accompanying statement of operations.
Additionally, the Company recorded a $3.7 million long-term liability at the
adoption date reflecting the present value of projected future asset retirement
obligations. The differential of $1.2 million, which primarily represents the
associated capitalized retirement costs, will be charged to earnings over the
remaining leasehold period. Neither the amounts charged to earnings in 2004 and
2003 nor the pro forma effect for the year ended December 31, 2002 (assuming
adoption of SFAS No. 143 as of January 1, 2002) were significant to net income
or earnings per share amounts.

4.   BUSINESS COMBINATIONS AND ANNOUNCED TRANSACTIONS

          During 2004, the Company completed six acquisitions in exchange for
aggregate cash consideration of $49.2 million and the assumption of certain
liabilities. In addition, cash payments of $23.2 million were made during the
year to former shareholders of businesses acquired in 2002 to fund amounts due
under earn-out arrangements and repay seller-financed notes. The 2004
transactions primarily consist of the following:

     On January 31, 2004, M-I SWACO acquired certain specialty chemical assets
     of Fortum Oil and Gas OY for cash consideration of $11.4 million. The
     acquired operations, formerly based in Finland, manufacture and market
     specialty chemical products which improve hydrocarbon flow rates.

     On July 31, 2004, Smith Services acquired certain operating assets of
     CanFish Services for cash consideration of $17.5 million. The acquired
     operations provide fishing, milling, casing exit, pipe recovery and related
     wireline services in the United States and Canada.

          The excess of the purchase price over the estimated fair value of the
net assets acquired amounted to $15.9 million and has been recorded as goodwill
in the Oilfield Products and Services segment. Approximately one-half of the
goodwill related to the 2004 acquisitions is expected to be deductible for tax
purposes. The purchase price allocation related to certain of the 2004
acquisitions is based on preliminary information and is subject to change when
additional data concerning final asset and liability valuations is obtained;
however, material changes in the preliminary allocations are not anticipated by
management.

          Additionally, in July 2004, the Company announced the signing of a
non-binding letter of intent related to the sale of Wilson Industries, Inc.
("Wilson") to CE Franklin Ltd. Under the terms of the proposed transaction, CE
Franklin would issue common stock and a note payable to the Company in exchange
for the common stock of Wilson. Subsequent to the proposed transaction, the
Company's ownership interest is expected to increase from the current 55 percent
to a level in excess of 85 percent of the outstanding shares of CE Franklin.
Accordingly, the Company would continue to consolidate the combined distribution
operations of Wilson and CE Franklin. The transaction is subject to a number of
factors, including negotiation of a definitive agreement, approval by the
minority shareholders of CE Franklin, ratification by the Board of Directors of
both companies and certain regulatory approvals. There are no assurances as to
whether this transaction ultimately will be consummated.


                                       37

<PAGE>

          During 2003, the Company completed three acquisitions in exchange for
aggregate cash consideration of $92.1 million and the assumption of certain
liabilities. In addition, cash payments of $9.7 million were made during the
year to former shareholders of businesses acquired in 2002 to fund amounts due
under earn-out arrangements and repay seller-financed notes. The 2003
transactions primarily consist of the following:

     On January 29, 2003, M-I SWACO acquired certain oilfield chemical assets of
     Dynea International in exchange for cash consideration of $77.8 million.
     The acquired operations, formerly based in Norway, provide a complete line
     of oilfield specialty chemicals used to eliminate hydrocarbon flow problems
     encountered during production and transportation.

     On October 1, 2003, M-I SWACO acquired certain operating assets of Alpine
     Mud Products for cash consideration of $14.1 million. The acquired
     operations market a line of specialty fluid additives used to enhance rates
     of penetration in critical drilling applications, primarily to customers in
     the U.S. Gulf Coast region.

          The excess of the purchase price over the estimated fair value of the
net assets acquired amounted to $66.1 million, which has been recorded as
goodwill predominantly in the Oilfield Products and Services segment.

          During 2002, the Company completed four acquisitions in exchange for
aggregate cash consideration of $60.2 million, the issuance of $24.8 million of
notes payable and the assumption of certain liabilities. The 2002 transactions
primarily consist of the following:

     On July 31, 2002, the Company acquired certain turbodrilling assets of
     Neyrfor-Weir Ltd. in exchange for cash consideration of $25.3 million. The
     acquired operations, which design proprietary turbodrilling equipment and
     provide related services for horizontal and directional drilling
     applications, have been integrated into the Company's Oilfield Products and
     Services segment.

     On October 11, 2002, M-I SWACO acquired CleanCut Technologies ("CleanCut")
     for cash consideration of $16.1 million and the issuance of notes to
     sellers totaling $23.9 million. CleanCut, formerly based in Scotland,
     designs, manufactures and installs waste collection and transportation
     systems for offshore drilling operations.

     On November 28, 2002, M-I SWACO acquired IKF Services, a drilling fluids
     and solids-control company located in Russia, for cash consideration of
     $13.4 million.

          The excess of the purchase price over the estimated fair value of the
net assets acquired amounted to $35.6 million in 2002, which has been recorded
as goodwill in the Oilfield Products and Services segment.

          These acquisitions have been recorded using the purchase method of
accounting and, accordingly, the acquired operations have been included in the
results of operations since the date of acquisition. Pro forma results of
operations have not been presented because the effect of these acquisitions was
not material to the Company's consolidated financial statements.

          The following schedule summarizes investing activities related to
2004, 2003 and 2002 acquisitions included in the consolidated statements of cash
flows:

<TABLE>
<CAPTION>
                                                                          2004       2003       2002
                                                                        --------   --------   --------
<S>                                                                     <C>        <C>        <C>
Fair value of tangible and identifiable intangible assets, net of
   cash acquired ....................................................   $ 44,103   $ 34,922   $ 57,480
Goodwill acquired ...................................................     15,860     66,147     35,616
Payments to former shareholders of businesses acquired ..............     23,162      9,692         --
Total liabilities assumed ...........................................    (10,775)    (8,972)   (32,944)
                                                                        --------   --------   --------
Cash paid for acquisitions, net of cash acquired ....................   $ 72,350   $101,789   $ 60,152
                                                                        ========   ========   ========
</TABLE>


                                       38

<PAGE>

5.   EARNINGS PER SHARE

          Basic earnings per share ("EPS") is computed using the weighted
average number of common shares outstanding during the period. Diluted EPS gives
effect to the potential dilution of earnings which could have occurred if
additional shares were issued for stock option exercises under the treasury
stock method. Outstanding employee stock options of 0.2 million, 1.1 million and
1.7 million as of December 31, 2004, 2003 and 2002, respectively, were not
included in the computation of diluted earnings per common share as the exercise
price was in excess of the average market price for the Company's stock during
the corresponding period. The following schedule reconciles the income and
shares used in the basic and diluted EPS computations (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                      2004       2003       2002
                                                    --------   --------   --------
<S>                                                 <C>        <C>        <C>
BASIC EPS:
Income before cumulative effect of change in
   accounting principle .........................   $182,451   $124,634   $ 93,189
                                                    ========   ========   ========
Weighted average number of common shares
   outstanding ..................................    101,332     99,815     98,984
                                                    ========   ========   ========
Basic EPS before cumulative effect of change in
   accounting principle .........................   $   1.80   $   1.25   $   0.94
                                                    ========   ========   ========

DILUTED EPS:
Income before cumulative effect of change in
   accounting principle .........................   $182,451   $124,634   $ 93,189
                                                    ========   ========   ========
Weighted average number of common shares
   outstanding ..................................    101,332     99,815     98,984
Dilutive effect of stock options ................      1,237      1,088      1,107
                                                    --------   --------   --------
                                                     102,569    100,903    100,091
                                                    ========   ========   ========
Diluted EPS before cumulative effect of change
   in accounting principle ......................   $   1.78   $   1.24   $   0.93
                                                    ========   ========   ========
</TABLE>

          All 2002 weighted average share and option amounts have been restated
for the impact of a two-for-one stock split effected in July 2002.

6.   INVENTORIES

          Inventories consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                          2004       2003
                                                                        --------   --------
<S>                                                                     <C>        <C>
Raw materials .......................................................   $ 78,773   $ 62,631
Work-in-process .....................................................     81,002     66,151
Products purchased for resale .......................................    252,486    170,973
Finished goods ......................................................    530,657    464,151
                                                                        --------   --------
                                                                         942,918    763,906
Reserves to state certain U.S. inventories (FIFO cost of $337,080
   and $266,328 in 2004 and 2003, respectively) on a LIFO basis .....    (52,456)   (24,279)
                                                                        --------   --------
                                                                        $890,462   $739,627
                                                                        ========   ========
</TABLE>

          During 2004, the Company recorded additional LIFO reserves of $28.2
million, primarily reflecting higher commodity prices for steel and alloy
products purchased by the Distribution segment.


                                       39

<PAGE>

7.   PROPERTY, PLANT AND EQUIPMENT

          Property, plant and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                                         2004         2003
                                      ----------   ----------
<S>                                   <C>          <C>
Land ..............................   $   35,954   $   38,394
Buildings .........................      147,442      134,568
Machinery and equipment ...........      555,469      511,615
Rental tools ......................      376,043      323,977
                                      ----------   ----------
                                       1,114,908    1,008,554
Less-Accumulated depreciation .....     (537,954)    (473,683)
                                      ----------   ----------
                                      $  576,954   $  534,871
                                      ==========   ==========
</TABLE>

8.   GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

          The following table presents goodwill on a segment basis as of the
dates indicated, as well as changes in the account during the period shown.
Beginning and ending goodwill balances are presented net of accumulated
amortization of $53.6 million:

<TABLE>
<CAPTION>
                                             Oilfield   Distribution
                                              Segment      Segment     Consolidated
                                             --------   ------------   ------------
<S>                                          <C>        <C>            <C>
Balance as of December 31, 2002 ..........   $582,786      $37,289       $620,075
Goodwill acquired ........................     66,052           95         66,147
Purchase price and other adjustments .....      3,984          387          4,371
                                             --------      -------       --------
Balance as of December 31, 2003 ..........    652,822       37,771        690,593
Goodwill acquired ........................     15,860           --         15,860
Purchase price and other adjustments .....      6,900           --          6,900
                                             --------      -------       --------
Balance as of December 31, 2004 ..........   $675,582      $37,771       $713,353
                                             ========      =======       ========
</TABLE>

Other Intangible Assets

          The components of other intangible assets at December 31, are as
follows:

<TABLE>
<CAPTION>
                                                     2004                                2003
                                      ---------------------------------   ---------------------------------
                                                                                                                Weighted
                                        Gross                               Gross                                Average
                                      Carrying    Accumulated             Carrying    Accumulated             Amortization
                                       Amount    Amortization     Net      Amount    Amortization     Net        Period
                                      --------   ------------   -------   --------   ------------   -------   ------------
                                                                                                                 (years)
<S>                                   <C>        <C>            <C>       <C>        <C>            <C>       <C>
Patents ...........................    $42,353      $14,532     $27,821    $38,520      $12,015     $26,505       15.6
License
   agreements .....................     26,044        4,420      21,624     19,086        2,193      16,893       11.3
Non-compete
   agreements and trademarks ......     20,772        8,899      11,873     19,583        5,649      13,934       12.5
Customer lists
   and contracts ..................      9,232        1,953       7,279      8,724          877       7,847       16.9
                                       -------      -------     -------    -------      -------     -------       ----
                                       $98,401      $29,804     $68,597    $85,913      $20,734     $65,179       13.9
                                       =======      =======     =======    =======      =======     =======       ====
</TABLE>

          Amortization expense of other intangible assets was $9.1 million, $7.5
million and $3.4 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Additionally, estimated future amortization expense is expected to
range between $5.1 million and $8.9 million a year for the next five fiscal
years.


                                       40

<PAGE>

9.   DEBT

         The following summarizes the Company's outstanding debt at December 31:

<TABLE>
<CAPTION>
                                                                                                  2004       2003
                                                                                               ---------   --------
<S>                                                                                            <C>         <C>
CURRENT:
   Short-term borrowings ...................................................................   $ 107,204   $ 53,090
   Current portion of long-term debt .......................................................     104,171     36,657
                                                                                               ---------   --------
      Short-term borrowings and current portion of long-term debt ..........................   $ 211,375   $ 89,747
                                                                                               =========   ========
LONG-TERM:
   Notes:
   6.75% Senior Notes maturing February 2011 with an effective interest rate of 6.83%
      Interest payable semi-annually (presented net of unamortized discount of $605 and
      $723 in 2004 and 2003, respectively) .................................................   $ 219,395   $219,277
   7.0% Senior Notes maturing September 2007 with an effective interest rate of 7.07%
      Interest payable semi-annually (presented net of unamortized discount of $277 and
      $381 in 2004 and 2003, respectively) .................................................     149,723    149,619
   7.7% Senior Secured Notes maturing July 2007. Principal due in equal annual
      installments of $7.1 million. Interest payable semi-annually .........................      21,428     28,571
   7.63% Notes payable to insurance companies maturing April 2006.  Principal due in
      equal annual installments of $3.3 million.  Interest payable semi-annually ...........       6,667     10,000

   Notes payable to various individuals repaid September 2004 ..............................          --     16,262

   Bank revolvers payable:
   $250.0 million revolving note expiring July 2005.  Interest payable quarterly at base
      rate (5.25% at December 31, 2004) or Eurodollar rate, as defined
      (3.10% at December 31, 2004) and described below .....................................      80,000     66,000

   M-I SWACO $150.0 million revolving note expiring July 2005. Interest payable
      quarterly at base rate (5.25% at December 31, 2004) or Eurodollar rate, as defined
      (3.10% at December 31, 2004) and described below .....................................          --         --

   Term Loans:
   M-I SWACO 315.0 million Norwegian Krone term loan payable to a financial institution.
      Principal due in semi-annual installments of 45.0 million Krone through June 2006.
      Interest payable semi-annually at adjusted Norwegian Interbank Offered Rate
      (3.01% at December 31, 2004) .........................................................      10,689     31,118

   Other ...................................................................................       4,067      4,358
                                                                                               ---------   --------
                                                                                                 491,969    525,205
   Less-Current portion of long-term debt ..................................................    (104,171)   (36,657)
                                                                                               ---------   --------
      Long-term debt .......................................................................   $ 387,798   $488,548
                                                                                               =========   ========
</TABLE>

Principal payments of long-term debt for years subsequent to 2005 are as
follows:

<TABLE>
<S>              <C>
2006 .........   $ 10,885
2007 .........    156,983
2008 .........         21
2009 .........         --
Thereafter ...    219,909
                 --------
                 $387,798
                 ========
</TABLE>


                                       41

<PAGE>

          The Company's short-term borrowings consist of amounts outstanding
under lines of credit and short-term loans. Certain subsidiaries of the Company
have unsecured credit facilities with non-U.S. banks aggregating $163.5 million
with $56.3 million of additional borrowing capacity available under these
facilities at December 31, 2004. These borrowings had a weighted average
interest rate of 7.5 percent and 8.3 percent at December 31, 2004 and 2003,
respectively.

          In addition to the credit facilities discussed above, the Company has
an unsecured revolving credit facility provided by a syndicate of nine financial
institutions. The revolving credit agreement (the "Agreement"), which expires
July 2005, includes a $400.0 million committed line of credit with a $50.0
million letter of credit sub-facility. The Agreement allows for the election of
interest at a base rate, or a Eurodollar rate ranging from LIBOR plus 62.5 to
75.0 basis points depending on amounts drawn under the facility. The Agreement
also requires the payment of a quarterly commitment fee of 15 basis points on
the unutilized portion of the facility and compliance with certain customary
covenants, including maintenance of specified debt-to-total capitalization and
interest coverage ratios, as defined. The LIBOR interest margins and the
commitment fee are subject to adjustment depending on the senior debt rating of
the Company. As of December 31, 2004, the Company had $80.0 million drawn and
$4.5 million of letters of credit issued under the facility, resulting in
additional borrowing capacity of $315.5 million.

          The 6.75 percent and 7.0 percent Senior Notes are unsecured
obligations of the Company issued under an Indenture dated September 8, 1997.
The Indenture contains no financial covenants, nor any restrictions related to
the payment of cash dividends to common stockholders. The Company's 6.75 percent
and 7.0 percent Senior Notes are redeemable by the Company, in whole or in part,
at any time prior to maturity at a redemption price equal to accrued interest
plus the greater of the principal amount or the present value of the remaining
principal and interest payments.

          The Company was in compliance with its loan covenants under the
various loan indentures, as amended, at December 31, 2004.

10. FINANCIAL INSTRUMENTS

Foreign Currency Contracts

          The Company enters into spot and forward contracts as a hedge against
foreign currency denominated assets and liabilities and foreign currency
commitments. The term of these contracts generally do not exceed two years. For
fair value hedges, realized and unrealized gains and losses are recognized
currently through earnings, and the resulting amounts generally offset foreign
exchange gains or losses on the related accounts. The Company recognized expense
of approximately $2.4 million, $4.9 million and $1.1 million in 2004, 2003 and
2002, respectively, related to net realized and unrealized losses on fair value
hedge contracts. Gains or losses on designated cash flow hedge contracts are
deferred to accumulated other comprehensive income and recognized in the
consolidated statement of operations when the hedged item affects earnings. The
Company recognized earnings of approximately $4.2 million, $4.4 million and $0.6
million in 2004, 2003 and 2002, respectively, related to cash flow hedge
contracts. As of December 31, 2004, the notional amount of fair value hedge
contracts outstanding was $97.2 million, approximating the fair value of these
contracts, and there were no cash flow hedge contracts outstanding. As of
December 31, 2003, the notional amounts of fair value hedge contracts and cash
flow hedge contracts outstanding were $45.5 million and $9.2 million,
respectively, and the fair value exceeded the notional amount of these contracts
by $1.9 million.

Fair Value of Other Financial Instruments

          The recorded and fair values of long-term debt at December 31 are as
follows:

<TABLE>
<CAPTION>
                            2004                   2003
                    --------------------   -------------------
                     Recorded     Fair     Recorded     Fair
                       Value      Value      Value      Value
                    ---------   --------   --------   --------
<S>                 <C>         <C>        <C>        <C>
Long-term Debt...   $491,969    $531,302   $525,205   $576,917
</TABLE>

          The fair value of long-term debt was primarily determined using quoted
market prices. The fair value of the remaining financial instruments, including
cash and cash equivalents, receivables, payables and short-term borrowings,
approximates the carrying value due to the short-term nature of these
instruments.


                                       42

<PAGE>

11. INCOME TAXES

          The geographical sources of income before income taxes, minority
interests and cumulative effect of change in accounting principle for the three
years ended December 31, 2004 were as follows:

<TABLE>
<CAPTION>
                                                               2004       2003       2002
                                                             --------   --------   --------
<S>                                                          <C>        <C>        <C>
Income before income taxes, minority interests and
   cumulative effect of change in accounting principle:
   United States .........................................   $119,770   $ 62,984   $ 40,198
   Non-United States .....................................    281,532    226,772    177,601
                                                             --------   --------   --------
   Total .................................................   $401,302   $289,756   $217,799
                                                             ========   ========   ========
</TABLE>

          The income tax provision is summarized as follows:

<TABLE>
<CAPTION>
                             2004        2003      2002
                           --------    -------   -------
<S>                        <C>         <C>       <C>
Current:
   United States .......   $ 47,651    $22,604   $(3,027)
   Non-United States ...     82,781     61,440    44,260
   State ...............      1,053      1,136     1,839
                           --------    -------   -------
                            131,485     85,180    43,072
                           --------    -------   -------
Deferred:
   United States .......     (2,116)       756    18,738
   Non-United States ...        925      7,398     4,822
   State ...............       (573)        --        --
                           --------    -------   -------
                             (1,764)     8,154    23,560
                           --------    -------   -------

Income tax provision ...   $129,721    $93,334   $66,632
                           ========    =======   =======
</TABLE>

          The consolidated effective tax rate (as a percentage of income before
income taxes, minority interests and cumulative effect of change in accounting
principle) is reconciled to the U.S. federal statutory tax rate as follows:

<TABLE>
<CAPTION>
                                                               2004   2003   2002
                                                               ----   ----   ----
<S>                                                            <C>    <C>    <C>
U.S. federal statutory tax rate ............................   35.0%  35.0%  35.0%
Minority partners' share of U.S. partnership earnings ......   (2.9)  (3.1)  (3.6)
Non-deductible expenses ....................................    1.0    1.1    0.7
Benefit of foreign sales corporation and extraterritorial
   income exclusion ........................................   (0.7)  (0.7)  (0.7)
State taxes, net ...........................................    0.1    0.6    0.8
Non-U.S. tax provisions which vary from the U.S.
   rate/non-U.S. losses with no tax benefit realized .......   (0.6)   0.8   (1.2)
Change in valuation allowance ..............................   (0.2)  (1.3)    --
Other items, net ...........................................    0.6   (0.2)  (0.5)
                                                               ----   ----   ----
Effective tax rate .........................................   32.3%  32.2%  30.5%
                                                               ====   ====   ====
</TABLE>


                                       43

<PAGE>

          The components of deferred taxes at December 31 are as follows:

<TABLE>
<CAPTION>
                                                                       2004        2003
                                                                    ---------   ---------
<S>                                                                 <C>         <C>
Deferred tax liabilities attributed to the excess of net book
   basis over remaining tax basis (principally depreciation):
   United States ................................................   $ (73,118)  $ (60,795)
   Non-United States ............................................     (49,795)    (46,517)
                                                                    ---------   ---------
   Total deferred tax liabilities ...............................    (122,913)   (107,312)
                                                                    ---------   ---------

Deferred tax assets attributed to net operating loss and tax
   credit carryforwards:
   United States ................................................       1,110          --
   Non-United States ............................................      15,317      16,039

Other deferred tax assets (principally accrued liabilities not
   deductible until paid and inventories):
   United States ................................................      61,157      49,400
   Non-United States ............................................       7,872       6,243
                                                                    ---------   ---------
   Subtotal .....................................................      85,456      71,682

Valuation allowance .............................................     (15,068)    (15,283)
                                                                    ---------   ---------
Total deferred tax assets .......................................      70,388      56,399
                                                                    ---------   ---------
   Net deferred tax liabilities .................................   $ (52,525)  $ (50,913)
                                                                    =========   =========

Balance sheet presentation:
   Deferred tax assets, net .....................................   $  47,083   $  31,238
   Other assets .................................................       3,459       4,140
   Income taxes payable .........................................      (9,290)     (6,226)
   Deferred tax liabilities .....................................     (93,777)    (80,065)
                                                                    ---------   ---------
   Net deferred tax liabilities .................................   $ (52,525)  $ (50,913)
                                                                    =========   =========
</TABLE>

          At December 31, 2004, the accompanying consolidated financial
statements include $15.3 million of deferred tax assets associated with
operating loss carryforwards in tax jurisdictions outside the United States.
Although the majority of these losses will carryforward indefinitely and are
available to reduce future tax liabilities of the respective foreign entity, we
do not currently believe the majority of these assets will be realized and have,
accordingly, established a $15.1 million valuation reserve.

          The valuation allowance as of December 31, 2003 totaled $15.3 million
which consisted of established reserves for foreign operating loss
carryforwards. During 2004, the valuation allowance was reduced by $0.2 million
as a result of expiration of operating loss carryforwards and changes in the
anticipated realizability of certain foreign deferred tax assets.

          The Company has provided additional taxes for the anticipated
repatriation of certain earnings of its non-U.S. subsidiaries. Undistributed
earnings above the amounts upon which additional taxes have been provided, which
approximated $228.4 million at December 31, 2004, are intended to be permanently
invested by the Company. It is not practicable to determine the amount of
applicable taxes that would be incurred if any of such earnings were
repatriated.

          The American Jobs Creation Act of 2004 (the "Act"), which was enacted
during the fourth quarter of 2004, creates a temporary incentive for U.S.
corporations to repatriate accumulated earnings of non-U.S. subsidiaries by
providing an 85 percent deduction for certain dividends from controlled foreign
corporations. While the Company continues to evaluate the provisions of the new
tax law and potential repatriations, management estimates that approximately
$436.0 million of accumulated earnings generated in jurisdictions outside of the
United States currently remain undistributed. Since the Company has not
completed its evaluation and, as of the current date, final guidance has not
been issued, management cannot reasonably estimate the amount, it any, of
repatriations which would be subject to the temporary tax relief.  In accordance
with FASB Staff Position No. 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004," the tax deduction, if any, will be recorded in the period in which the
effect becomes estimable.


                                       44

<PAGE>

12.  STOCKHOLDERS' EQUITY

Dividend Program

          Subsequent to December 31, 2004, the Company's Board of Directors
approved a cash dividend program for stockholders and declared a quarterly cash
dividend of $0.12 per share, with the first dividend payment to be made April
15, 2005 to stockholders of record on March 15, 2005. The level of future
dividend payments will be at the discretion of the Board of Directors and will
depend upon the Company's financial condition, earnings and cash flow from
operations, the level of its capital expenditures, compliance with certain debt
covenants, its future business prospects and other factors that the Board of
Directors deems relevant.

Common Stock Repurchases

          During 2001, the Company's Board of Directors authorized a share
buyback program which allows for the repurchase of up to 5.0 million shares of
common stock, subject to regulatory issues, market considerations and other
relevant factors. During 2004, the Company repurchased 1.8 million shares of
common stock at an aggregate cost of $92.0 million, bringing the total number of
shares acquired under the program to 2.9 million. The acquired shares have been
added to the Company's treasury stock holdings and may be used in the future for
acquisitions or other corporate purposes. Future repurchases under the program
may be executed from time to time in the open market or in privately negotiated
transactions.

Stock Split

          On June 6, 2002, the Company's Board of Directors approved a
two-for-one stock split, effected in the form of a stock dividend. Stockholders
of record as of June 20, 2002 were entitled to the dividend, which was
distributed on July 8, 2002. Unless otherwise noted, all share and option
amounts included in the accompanying consolidated financial statements and
related notes reflect the effect of the stock split.

Stockholder Rights Plan

          On June 8, 2000, the Company adopted a Stockholder Rights Plan (the
"Rights Plan") to replace a similar plan which expired on June 19, 2000. As part
of the Rights Plan, the Company's Board of Directors declared a dividend of one
preferred stock purchase right ("Right") for each share of the Company's common
stock outstanding on June 20, 2000. The Board also authorized the issuance of
one such Right for each share of the Company's common stock issued after June
20, 2000 until the occurrence of certain events.

          The Rights are exercisable upon the occurrence of certain events
related to a person (an "Acquiring Person") acquiring or announcing the
intention to acquire beneficial ownership of 20 percent or more of the Company's
common stock. When the rights become exercisable, each holder (except an
Acquiring Person) will be entitled to purchase, at an effective exercise price
of $175, shares of the Company's common stock having a market value of twice the
Right's exercise price, subject to adjustment. The Acquiring Person will not be
entitled to exercise these Rights. In addition, if the Company is involved in a
merger or other business combination transaction, or sells 50 percent or more of
its assets or earning power to another entity, each Right will entitle its
holder to purchase, at the Right's then current exercise price, shares of common
stock of such other entity having a value of twice the Right's exercise price.

          The Rights are subject to redemption at the option of the Board of
Directors at a price of one-half of a cent per Right until the occurrence of
certain events. The Rights currently trade with the Company's common stock, have
no voting or dividend rights and expire on June 8, 2010.

Accumulated Other Comprehensive Income

          Accumulated other comprehensive income in the accompanying
consolidated balance sheets consists of the following:

<TABLE>
<CAPTION>
                                              2004      2003
                                            -------   -------
<S>                                         <C>       <C>
Currency translation adjustments.........   $27,783   $12,820
Unrealized fair value of derivatives.....      (132)    2,339
Pension liability adjustments............    (3,247)   (3,534)
                                            -------   -------
Accumulated other comprehensive income...   $24,404   $11,625
                                            =======   =======
</TABLE>

          Approximately $0.2 million of the unrealized fair value of derivatives
is expected to be recognized as after-tax earnings during the fiscal year ending
December 31, 2005.


                                       45

<PAGE>

13.  RETIREMENT PLANS

Defined Contribution Plans

          The Company established the Smith International, Inc. 401(k)
Retirement Plan (the "Smith Plan") for the benefit of all eligible employees.
Employees may voluntarily contribute a percentage of their compensation, as
defined, to the Smith Plan. The Company makes basic, retirement and, in certain
cases, discretionary matching contributions to each participant's account under
the Smith Plan. Participants receive a basic match on contributions to the Smith
Plan of up to 1 1/2 percent of qualified compensation and a retirement
contribution ranging from two percent to six percent of qualified compensation.
In addition, the Board of Directors may provide discretionary profit-sharing
contributions based upon financial performance to participants who are employed
by the Company on December 31.

          Through September 30, 2004, eligible employees of Wilson Industries,
Inc. (the "Wilson employees") participated in the Smith Plan. Effective October
1, 2004, the Company established the Wilson 401(k) Retirement Plan (the "Wilson
Plan") and transferred account balances of the Wilson employees into this plan
from the Smith Plan. Employees may voluntarily contribute a percentage of their
compensation, as defined, to the Wilson Plan. Wilson makes matching
contributions to each participant's account ranging from two to six percent of
qualified compensation. In addition, the Board of Directors may provide
discretionary profit-sharing contributions based upon financial performance to
participants who are employed by Wilson on December 31.

          M-I SWACO has a company Profit-Sharing and Savings Plan (the "M-I
Retirement Plan") under which participating employees may voluntarily contribute
a percentage of their compensation, as defined. At its discretion, M-I SWACO may
make basic, matching and in certain cases, discretionary matching contributions
to each participant's account under the M-I Retirement Plan. Participants are
eligible to receive a basic contribution equal to three percent of qualified
compensation, and a full match on employee contributions of up to 1 1/2 percent
of qualified compensation. In addition, the Board of Directors may provide
discretionary profit-sharing contributions based upon financial performance to
participants who are employed by M-I SWACO on December 31.

          The Company recognized expense totaling $34.0 million, $25.0 million
and $17.6 million in 2004, 2003 and 2002, respectively, related to Company
contributions to the plans.

          Certain of the Company's subsidiaries sponsor various defined
contribution plans. The Company's contributions under these plans for each of
the three years in the period ended December 31, 2004, were immaterial.

Deferred Compensation Plan

          The Company maintains a Supplemental Executive Retirement Plan
("SERP"), a non-qualified, deferred compensation program, for the benefit of
officers and certain other eligible employees of the Company. Participants may
contribute, on a pre-tax basis, maximum amounts ranging from 50 percent to 100
percent of cash compensation, as defined. Plan provisions allow for retirement
and matching contributions, similar to those provided under the Company's
defined contribution programs, and, in certain cases, an interest contribution
in order to provide a yield on short-term investments equal to 120 percent of
the long-term applicable federal rate, as defined.

          In the event of insolvency or bankruptcy, plan assets are available to
satisfy the claims of all general creditors of the Company. Accordingly, the
accompanying consolidated balance sheets reflect the aggregate participant
balances as both an asset and a liability of the Company. As of December 31,
2004 and 2003, $42.0 million and $35.8 million, respectively, are included in
other assets with a corresponding amount recorded in other long-term
liabilities.

          During the years ended December 31, 2004, 2003 and 2002, Company
contributions to the plan totaled $2.6 million, $2.4 million and $1.9 million,
respectively.


                                       46

<PAGE>

14.  EMPLOYEE BENEFIT PLANS

          The Company currently maintains various defined benefit pension plans
covering certain U.S. and non-U.S. employees. Future benefit accruals and the
addition of new participants under the U.S. plans were frozen prior to 1998.
Participation in certain non-U.S. pension plans has recently increased due to
continued business expansion, in part associated with acquired operations; and
accordingly, the prior years' information has been conformed to the 2004
presentation, where applicable.

          The Company and certain subsidiaries have postretirement benefit plans
which provide health care benefits to a limited number of current, and in
certain cases, future retirees. Individuals who elect to contribute premiums are
eligible to participate in the Company's medical and prescription drug programs,
with certain limitations. In addition to premiums, the retiree is responsible
for deductibles and any required co-payments and is subject to annual and
lifetime dollar spending caps.

          The following tables disclose the changes in benefit obligations and
plan assets during the periods presented and reconcile the funded status of the
plans to the amounts included in the accompanying consolidated balance sheets:

<TABLE>
<CAPTION>
                                                          PENSION PLANS     POSTRETIREMENT BENEFIT PLANS
                                                        -----------------   ----------------------------
                                                          2004      2003          2004       2003
                                                        -------   -------       --------   --------
<S>                                                     <C>       <C>       <C>            <C>
Changes in benefit obligations:
   Benefit obligations at beginning of year .........   $35,701   $31,072       $ 11,160   $ 10,581
   Service cost .....................................     2,355     1,889            233        219
   Interest cost ....................................     2,181     1,934            643        685
   Plan participants' contributions .................        54        41            790        735
   Actuarial loss (gain) ............................     2,394     1,778           (929)       783
   Benefits paid ....................................    (1,116)   (1,013)        (1,155)    (1,843)
                                                        -------   -------       --------   --------
   Benefit obligations at end of year ...............   $41,569   $35,701       $ 10,742   $ 11,160
                                                        =======   =======       ========   ========

Changes in plan assets:
   Fair value of plan assets at beginning of year ...   $28,771   $24,719       $     --   $     --
   Actual return on plan assets .....................     3,686     2,848             --         --
   Employer contributions ...........................     3,537     2,176            365      1,108
   Plan participants' contributions .................        54        41            790        735
   Benefits paid ....................................    (1,116)   (1,013)        (1,155)    (1,843)
                                                        -------   -------       --------   --------
   Fair value of plan assets at end of year .........   $34,932   $28,771       $     --   $     --
                                                        =======   =======       ========   ========

   Funded status ....................................   $(6,637)  $(6,930)      $(10,742)  $(11,160)
   Unrecognized net actuarial loss (gain) ...........     7,028     6,775         (4,148)    (3,391)
   Unrecognized prior service cost ..................       (77)      (73)        (1,551)    (1,916)
   Unrecognized net transition obligation (asset) ...        44      (437)            --         --
                                                        -------   -------       --------   --------
   Net prepaid benefit (accrued liability) ..........   $   358   $  (665)      $(16,441)  $(16,467)
                                                        =======   =======       ========   ========
</TABLE>

          The net prepaid benefit (liability) associated with the Pension Plans
is reflected in the accompanying consolidated balance sheets in the following
captions:

<TABLE>
<S>                                         <C>       <C>
Prepaid expenses and other...............   $ 2,221   $ 1,453
Other long-term liabilities..............    (6,286)   (7,289)
Deferred taxes...........................     1,176     1,637
Accumulated other comprehensive income...     3,247     3,534
                                            -------   -------
Net amount recognized....................   $   358   $  (665)
                                            =======   =======
</TABLE>

          Accrued liabilities associated with the Postretirement Benefit Plans,
which totaled $16.4 million and $16.5 million as of December 31, 2004 and 2003,
respectively, are reflected in the accompanying consolidated balance sheets as
other long-term liabilities.


                                       47

<PAGE>

Net Periodic Benefit Expense

          Net periodic benefit expense and the weighted average assumptions used
to determine the net benefit expense for the fiscal years ended December 31 and
the projected benefit obligation at December 31 are as follows:

<TABLE>
<CAPTION>
                                                        PENSION PLANS          POSTRETIREMENT BENEFIT PLANS
                                                 ---------------------------   ----------------------------
                                                   2004      2003      2002        2004    2003    2002
                                                 -------   -------   -------      -----   -----   -----
<S>                                              <C>       <C>       <C>       <C>        <C>     <C>
Components of net periodic benefit expense:
   Service cost...............................   $ 2,355   $ 1,889   $ 1,403      $ 233   $ 219   $ 220
   Interest cost..............................     2,181     1,934     1,833        643     685     981
   Return on plan assets......................    (2,050)   (1,701)   (1,668)        --      --      --
   Amortization of prior service cost.........        82       118        68       (365)   (365)   (243)
   Amortization of loss (gain)................       355       275       107       (172)   (251)   (243)
                                                 -------   -------   -------      -----   -----   -----
   Net periodic benefit expense...............   $ 2,923   $ 2,515   $ 1,743      $ 339   $ 288   $ 715
                                                 =======   =======   =======      =====   =====   =====

Net periodic benefit expense:

   Discount rate..............................      6.00%     6.75%     7.25%      6.00%   6.75%   7.25%
   Expected return on plan assets.............      8.50%     8.50%     8.50%       N/A     N/A     N/A
Projected benefit obligation:

   Discount rate..............................      5.75%     6.00%     6.75%      5.75%   6.00%   6.75%
   Expected return on plan assets.............      8.50%     8.50%     8.50%       N/A     N/A     N/A
</TABLE>

Additional Pension Plan Information

          In determining the expected return on plan assets, the Company
considers the investment mix, the historical market performance and economic and
other indicators of future performance. The Company primarily utilizes a mix of
common stock and fixed income index funds to generate asset returns comparable
with the general market. The investment mix of pension assets at December 31 is
summarized in the following table:

<TABLE>
<CAPTION>
                                                     2004   2003
                                                     ----   ----
<S>                                                  <C>    <C>
Common stock and related index funds..............    43%    44%
Fixed income securities and related index funds...    33     32
Real estate.......................................     4      3
Money market funds................................    20     21
                                                     ----   ----
   Total..........................................   100%   100%
                                                     ====   ====
</TABLE>

          For pension plans with accumulated benefit obligations in excess of
plan assets, the following table sets forth the projected and accumulated
benefit obligations and the fair value of plan assets at December 31:

<TABLE>
<CAPTION>
                                      2004      2003
                                    -------   -------
<S>                                 <C>       <C>
Projected benefit obligation.....   $41,569   $35,701
Accumulated benefit obligation...    41,569    35,701
Plan assets at fair value........    34,932    28,771
</TABLE>

          Estimated future benefit payments based on projected future service
are expected to range between $0.6 million and $1.0 million a year for the next
five years and approximate $6.8 million for the five-year period ending December
31, 2014. Company contributions to the pension plans during 2005 are expected to
be comparable to the $3.5 million contributed in 2004.


                                       48

<PAGE>

Additional Postretirement Benefit Plan Information

          The assumed health care cost trend rates used to determine the
projected postretirement benefit obligation at December 31 are as follows:

<TABLE>
<CAPTION>
                                                                            2004    2003
                                                                            ----   -----
<S>                                                                         <C>    <C>
Health care cost trend rate for current year.............................     10%    10%
Rate that the cost trend rate gradually declines (ultimate trend rate)...      5%     5%
Year that the rate reaches the ultimate trend rate.......................   2009   2008
</TABLE>

          A one-percentage point change in assumed health care cost trend rates
would have the following effects on the benefit obligations and the aggregate of
the service and interest cost components of the postretirement benefits expense:

<TABLE>
<CAPTION>
                                                                 ONE-          ONE-
                                                             PERCENTAGE-   PERCENTAGE-
                                                                POINT         POINT
                                                               INCREASE      DECREASE
                                                             -----------   -----------
<S>                                                          <C>           <C>
Effect on total service and interest cost.................       $ 84         $ (85)
Effect on accumulated postretirement benefit obligation...        468          (696)
</TABLE>

          Estimated future benefit payments based on projected future service
are expected to range between $0.7 million and $0.9 million a year for the next
five years and approximate $5.1 million for the five-year period ending
December 31, 2014. Company contributions to the postretirement benefit plans
during 2005 are expected to be comparable to the $0.4 million contributed in
2004.

15.  LONG-TERM INCENTIVE COMPENSATION

          The Company maintains a long-term incentive compensation program,
including stock options and restricted stock awards, for the benefit of key
employees.

Stock Options

          A summary of the Company's stock option program is presented below.

<TABLE>
<CAPTION>
                                         SHARES      WEIGHTED AVERAGE
                                      UNDER OPTION    EXERCISE PRICE
                                      ------------   ----------------
<S>                                   <C>            <C>
Outstanding at December 31, 2001...     5,168,798         $22.21

Options granted....................     1,399,180          33.66
Options forfeited..................      (116,722)         24.43
Options exercised..................      (223,492)         13.93
                                      -----------         ------
Outstanding at December 31, 2002...     6,227,764          25.04

Options granted....................     1,047,000          38.82
Options forfeited..................       (38,196)         29.77
Options exercised..................    (1,161,564)         19.02
                                      -----------         ------
Outstanding at December 31, 2003...     6,075,004          28.53

Options granted....................       191,456          56.26
Options forfeited..................       (79,841)         34.67
Options exercised..................    (2,555,579)         22.83
                                      -----------         ------
Outstanding at December 31, 2004...     3,631,040         $33.88
                                      ===========         ======
</TABLE>


                                       49

<PAGE>

          The number of outstanding fixed stock options exercisable at December
31, 2003 and 2002 was 3,261,816 and 3,205,106, respectively. These options had a
weighted average exercise price of $24.30 and $21.21 at December 31, 2003 and
2002, respectively. The following summarizes information about fixed stock
options outstanding at December 31, 2004:

<TABLE>
<CAPTION>
                             Options Outstanding                Options Exercisable
                  -----------------------------------------   ----------------------
                                    Weighted       Weighted                 Weighted
                                     Average        Average                  Average
    Range of         Number         Remaining      Exercise      Number     Exercise
Exercise Prices   Outstanding   Contractual Life     Price    Exercisable     Price
---------------   -----------   ----------------   --------   -----------   --------
<S>               <C>           <C>                <C>        <C>           <C>
$ 8.94 - $11.78       15,937           3.7          $11.60        15,937     $11.60
$19.60 - $23.50      822,930           6.7           23.08       639,685      22.95
$30.75 - $36.52    1,587,037           7.1           33.77     1,036,648      33.27
$38.82 - $56.26    1,205,136           9.1           41.68       251,545      38.82
                   ---------           ---          ------     ---------     ------
                   3,631,040           7.7          $33.88     1,943,815     $30.41
                   =========           ===          ======     =========     ======
</TABLE>

          The pro forma net income and earnings per share data disclosed in Note
1 has been determined as if the Company had accounted for its employee
stock-based compensation program under the fair value method of SFAS No. 123.
The Company used an open form (lattice) model to determine the fair value of
each 2004 option grant, and accordingly, calculate the stock-based compensation
expense. The Black-Scholes method was used to calculate the fair value of
options granted prior to 2004. The fair value and assumptions used are as
follows:

<TABLE>
<CAPTION>
                                           2004     2003     2002
                                          ------   ------   ------
<S>                                       <C>      <C>      <C>
Fair value of stock options granted ...   $17.84   $13.02   $15.36
Expected life of option (years) .......      5.0      5.0      5.0
Expected stock volatility .............     31.0%    31.0%    46.3%
Expected dividend yield ...............      N/A      N/A      N/A
Risk-free interest rate ...............      3.6%     3.5%     3.2%
</TABLE>

Restricted Stock

          In addition to stock option awards, the Company's long-term incentive
plan allows for the issuance of restricted stock and restricted stock units. In
December 2004, the Board of Directors approved the grant of performance-based
restricted stock units ("performance units"), subject to shareholder approval at
the 2005 annual meeting. Restricted stock units representing 40,504 shares were
issued in December 2004 with a grant date market value of $56.26 per share.
Accordingly, compensation expense related to the restricted unit awards,
calculated as the difference between the market value and the exercise price, is
recognized ratably over the four-year vesting period and totaled approximately
$0.1 million in 2004. If approved at the 2005 annual meeting, approximately
153,340 performance units will be awarded during the second quarter of 2005. The
number of units ultimately issued, however, will be subject to adjustment based
on the return on equity attained by the Company. Compensation expense for the
performance units will be recognized ratably over the three-year vesting period
and, if necessary, periodic adjustments will be recorded to account for changes
in expected return on equity. Although there is no assurance that the proposal
will be approved at the 2005 annual meeting, if the performance units had been
issued on December 31, 2004, the related annual compensation expense would have
approximated $3.0 million.

16. INDUSTRY SEGMENTS AND INTERNATIONAL OPERATIONS

          The Company manufactures and markets premium products and services to
the oil and gas exploration and production industry, the petrochemical industry
and other industrial markets. The Company aggregates its operations into two
reportable segments: Oilfield Products and Services and Distribution. The
Oilfield Products and Services segment consists of three business units: M-I
SWACO, which provides drilling and completion fluid systems and services,
solids-control and separation equipment, waste-management services and oilfield
production chemicals; Smith Technologies, which designs, manufactures and sells
three-cone drill bits, diamond drill bits and turbine products; and Smith
Services, which manufactures and markets products and services used for
drilling, workover, well completion and well re-entry operations. The principal
markets for the Oilfield segment include all major oil and gas-producing regions
of the world, with approximately 60 percent of revenues generated in markets
outside of North America. Oilfield segment customers primarily include major
multi-national, independent and national, or state-owned, oil companies.


                                       50

<PAGE>

          The Distribution segment consists of one business unit, Wilson, which
markets pipe, valves, fittings and mill, safety and other maintenance products
to energy and industrial markets. The Distribution segment has the most
significant North American exposure of any of the Company's operations with
approximately 90 percent of revenues derived in the United States and Canada.
Approximately two-thirds of Wilson's revenues are generated from customers in
the energy sector, which includes major multi-national and independent oil
companies, pipeline companies and contract drilling companies. The remainder
relates to sales in the downstream and industrial markets, which primarily
includes refineries, petrochemical and power generation plants.

          The Company's revenues are derived principally from uncollateralized
customer sales. The significant energy industry concentration has the potential
to impact the Company's exposure to credit risk, either positively or
negatively, because customers may be similarly affected by changes in economic
or other conditions. The creditworthiness of the Company's customer base is
strong, with limited credit losses experienced on such receivables.

          The following table presents financial information for each reportable
segment:

<TABLE>
<CAPTION>
                                           2004         2003         2002
                                        ----------   ----------   ----------
<S>                                     <C>          <C>          <C>
Revenues:
   Oilfield Products and Services ...   $3,236,339   $2,678,274   $2,282,909
   Distribution .....................    1,182,676      916,554      887,171
                                        ----------   ----------   ----------
                                        $4,419,015   $3,594,828   $3,170,080
                                        ==========   ==========   ==========
Operating Income (Loss):
   Oilfield Products and Services ...   $  423,648   $  343,486   $  266,692
   Distribution .....................       26,513       (7,897)      (4,026)
   General corporate ................      (11,397)      (6,842)      (6,518)
                                        ----------   ----------   ----------
                                        $  438,764   $  328,747   $  256,148
                                        ==========   ==========   ==========
Capital Expenditures:
   Oilfield Products and Services ...   $  108,773   $   96,458   $   91,056
   Distribution .....................        2,428        2,009        3,401
   General corporate ................          248          456        2,594
                                        ----------   ----------   ----------
                                        $  111,449   $   98,923   $   97,051
                                        ==========   ==========   ==========
Depreciation and Amortization:
   Oilfield Products and Services ...   $   98,258   $   93,541   $   81,924
   Distribution .....................        7,209        6,913        5,857
   General corporate ................        1,026        1,255        1,546
                                        ----------   ----------   ----------
                                        $  106,493   $  101,709   $   89,327
                                        ==========   ==========   ==========
Total Assets:
   Oilfield Products and Services ...   $2,905,850   $2,604,176   $2,301,735
   Distribution .....................      493,434      405,413      368,206
   General corporate ................      107,494       87,458       79,604
                                        ----------   ----------   ----------
                                        $3,506,778   $3,097,047   $2,749,545
                                        ==========   ==========   ==========
</TABLE>

          The following table presents consolidated revenues by region:

<TABLE>
<CAPTION>
                              2004         2003         2002
                           ----------   ----------   ----------
<S>                        <C>          <C>          <C>
United States ..........   $1,982,467   $1,592,243   $1,492,710
Canada .................      487,552      362,874      286,640
                           ----------   ----------   ----------
   North America .......    2,470,019    1,955,117    1,779,350
                           ----------   ----------   ----------
Latin America ..........      424,053      344,283      305,498
Europe/Africa ..........      961,755      855,916      681,947
Middle East ............      366,114      302,872      276,365
Far East ...............      197,074      136,640      126,920
                           ----------   ----------   ----------
   Non-North America ...    1,948,996    1,639,711    1,390,730
                           ----------   ----------   ----------
                           $4,419,015   $3,594,828   $3,170,080
                           ==========   ==========   ==========
</TABLE>


                                       51

<PAGE>

          The following table presents net property, plant and equipment by
region:

<TABLE>
<CAPTION>
                             2004       2003       2002
                           --------   --------   --------
<S>                        <C>        <C>        <C>
United States ..........   $306,505   $295,243   $299,206
Canada .................     34,603     29,918     27,854
                           --------   --------   --------
   North America .......    341,108    325,161    327,060
                           --------   --------   --------
Latin America ..........     50,208     51,831     49,469
Europe/Africa ..........    133,290    107,347    102,188
Middle East ............     32,920     32,364     24,988
Far East ...............     19,428     18,168     15,515
                           --------   --------   --------
   Non-North America ...    235,846    209,710    192,160
                           --------   --------   --------
                           $576,954   $534,871   $519,220
                           ========   ========   ========
</TABLE>

          The Company's expenditures for research and engineering activities are
attributable to the Company's Oilfield Products and Services segment and totaled
$67.2 million in 2004, $55.6 million in 2003 and $50.6 million in 2002.

17.  COMMITMENTS AND CONTINGENCIES

Leases

          The Company routinely enters into operating and capital leases for
certain of its facilities and equipment. Amounts related to assets under capital
lease were immaterial for the periods presented. Rent expense totaled $94.8
million, $79.0 million and $71.2 million in 2004, 2003 and 2002, respectively.

          Future minimum payments under non-cancelable operating leases having
initial terms of one year or more are as follows:

<TABLE>
<CAPTION>
                  AMOUNT
                 --------
<S>              <C>
2005 .........   $ 43,263
2006 .........     33,120
2007 .........     23,914
2008 .........     16,920
2009 .........     11,771
2010-2014 ....     29,541
Thereafter ...     17,654
                 --------
                 $176,183
                 ========
</TABLE>

          In the normal course of business, the Company enters into lease
agreements with cancellation provisions as well as agreements with initial terms
of less than one year. The costs related to these leases have been reflected in
rent expense but have been appropriately excluded from the future minimum
payments presented above.

Standby Letters of Credit and Guarantees

          In the normal course of business with customers, vendors and others,
the Company is contingently liable for performance under standby letters of
credit and bid, performance and surety bonds. Certain of these outstanding
instruments guarantee payment to insurance companies which reinsure certain
liability coverages of the Company's insurance captive. Excluding the impact of
these instruments, for which $15.5 million of related liabilities are reflected
in the accompanying consolidated balance sheet, the Company is contingently
liable for approximately $65.4 million of standby letters of credit and bid,
performance and surety bonds at December 31, 2004. Management does not expect
any material amounts to be drawn on these instruments.

          During the fourth quarter of 2004, the Company obtained a surety bond
in the amount of $43.5 million in connection with its appeal of the patent
infringement litigation discussed below. After taking into consideration amounts
reflected in the accompanying consolidated balance sheet, the Company has a
contingent liability of up to $18.2 million associated with this instrument.
Management, however, does not expect any amounts to be drawn on this instrument.


                                       52

<PAGE>

          The Company has also provided loan guarantees related to certain joint
ventures accounted for under the equity method of accounting. As the net assets
and cash flows of these entities are available to satisfy obligations as they
become due, management believes the likelihood is remote that the Company will
be required to perform under these guarantees. The Company's estimated maximum
exposure under these loan guarantees approximated $20.8 million as of December
31, 2004.

Insurance

          The Company maintains insurance coverage for various aspects of its
business and operations. The Company has elected to retain a portion of losses
that occur through the use of deductibles and retentions under its insurance
programs. Amounts in excess of the self-insured retention levels are fully
insured to limits believed appropriate for the Company's operations.
Self-insurance accruals are based on claims filed and an estimate for claims
incurred but not reported. While management believes that amounts accrued in the
accompanying consolidated financial statements are adequate for expected
liabilities arising from the Company's portion of losses, estimates of these
liabilities may change as circumstances develop.

Litigation

Halliburton Energy Services, Inc. v. Smith International, Inc.

          In September 2002, the Company was served with a complaint in the U.S.
District Court for the Eastern District of Texas, Sherman Division entitled
Halliburton Energy Services, Inc. v. Smith International, Inc. This lawsuit is a
patent infringement claim alleging that certain roller cone drill bits made by
the Company infringe several U.S. patents owned by Halliburton.

          The case was tried in the second quarter of 2004 and ultimately the
plaintiff was awarded $41.1 million, which includes the original jury assessment
of $24.0 million, a subsequent award enhancement, attorney's fees and
prejudgment interest. The Company filed a notice of appeal in the fourth quarter
of 2004, and a ruling from the appellate court is not anticipated until the
first quarter of 2006.

          Prior to the trial of the U.S. case, various infringement actions and
revocation proceedings in the U.K. were consolidated in the Patents Court of the
High Court of Justice of England and Wales. This consolidated proceeding is
essentially a U.K. counterpart to the U.S. patent action mentioned above. The
case went to trial in January 2005, and a ruling from the court is not
anticipated until the second quarter of 2005. The Company is defending the
allegations and seeking to invalidate the patents involved. Furthermore, outside
counsel has advised the Company that any damages that could potentially be shown
by the plaintiff in the U.K. case have already been satisfied in the U.S. patent
action mentioned above.

          Although an appeal is underway related to the U.S. case, the Company
is continuing to pursue other options, including possible settlement of related
claims outstanding. Based on the facts and circumstances and the opinion of
outside counsel, management believes that the amounts recognized by the Company
reflect the best estimate of its potential loss exposure as disclosed in Note 2.

Rose Dove Egle v. John M. Egle, et al.

          In April 1997, the Company acquired all of the equity interests in
Tri-Tech Fishing Services, L.L.C. ("Tri-Tech") in exchange for cash
consideration of approximately $20.4 million (the "Transaction").

          In August 1998, the Company was added as a defendant in a First
Amended Petition filed in the 15th Judicial District Court, Parish of Lafayette,
Louisiana entitled Rose Dove Egle v. John M. Egle, et al. In the amended
petition, the plaintiffs alleged that, due to an improper conveyance of
ownership interest by the Tri-Tech majority partner prior to the Transaction,
Smith purchased a portion of its equity interest from individuals who were not
legally entitled to their Tri-Tech shares. The suit was tried in the first
quarter of 2004, and a jury verdict of approximately $4.8 million was rendered
in favor of the plaintiffs. The Company has initiated the appeal process and
does not anticipate a ruling from the appellate court until the first quarter of
2006. Based upon the facts and circumstances and the opinion of outside legal
counsel, management believes that an unfavorable outcome on this matter is not
probable at this time. Accordingly, the Company has not recognized a loss
provision in the accompanying consolidated financial statements.


                                       53

<PAGE>

Other

          The Company is a defendant in various other legal proceedings arising
in the ordinary course of business. In the opinion of management, these matters
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.

Environmental

          The Company routinely establishes and reviews the adequacy of reserves
for estimated future environmental clean-up costs for properties currently or
previously operated by the Company.

          In connection with most business acquisitions, the Company obtains
contractual indemnifications from the seller related to environmental matters.
These indemnifications generally provide for the reimbursement of environmental
clean-up costs incurred by the Company for events occurring or circumstances
existing prior to the purchase date, whether the event or circumstance was known
or unknown at that time. A substantial portion of the Company's total
environmental exposure is associated with its M-I SWACO operations, which are
subject to various indemnifications from former owners.

          As of December 31, 2004, the Company's environmental reserve totaled
$9.0 million. This amount reflects the future undiscounted estimated exposure
related to identified properties, without regard to indemnifications from former
owners. While actual future environmental costs may differ from estimated
liabilities recorded at December 31, 2004, the Company does not believe that
these differences will have a material impact on the Company's financial
position or results of operations, subject to the indemnifications in place.

          During 2003, the Company took legal action against M-I SWACO's former
owners to clarify certain contractual provisions of the environmental
indemnification upon which approximately $8.3 million of remediation costs
properly incurred under the indemnification remains unpaid. This matter is
expected to go to trial during the second quarter of 2005. In the event that (i)
M-I SWACO's former owners and other parties to indemnification agreements with
the Company do not fulfill their obligations, and (ii) costs incurred to
remediate the identified properties reach estimated maximum exposure limits, the
Company would be required to record an additional charge of up to $25.0 million,
impacting earnings and cash flows in future periods.

18.  QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                FIRST       SECOND        THIRD       FOURTH        YEAR
                                             ----------   ----------   ----------   ----------   ----------
                                                          (In thousands, except per share data)
<S>                                          <C>          <C>          <C>          <C>          <C>
2004
Revenues .................................   $1,017,788   $1,064,450   $1,119,184   $1,217,593   $4,419,015
Gross profit .............................      314,002      327,368      338,983      371,586    1,351,939
Net income ...............................       44,850       27,477       51,893       58,231      182,451
EPS:
   Basic .................................         0.44         0.27         0.51         0.57         1.80
   Diluted ...............................         0.44         0.27         0.51         0.57         1.78

2003
Revenues .................................   $  808,837   $  877,657   $  924,792   $  983,542   $3,594,828
Gross profit .............................      238,343      261,910      278,402      297,276    1,075,931
Income before cumulative effect of
   change in accounting principle ........       21,715       29,900       35,004       38,015      124,634
Net income ...............................       20,561       29,900       35,004       38,015      123,480
EPS before cumulative effect of change
   in accounting principle:
   Basic .................................         0.22         0.30         0.35         0.38         1.25
   Diluted ...............................         0.22         0.30         0.35         0.38         1.24
</TABLE>


                                       54

<PAGE>

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

     None.

ITEM 9A. CONTROLS AND PROCEDURES

          The Company maintains disclosure controls and procedures and internal
controls designed to provide reasonable assurances that information required to
be disclosed in our filings under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time frame specified in
the Commission's rules and regulations. Our principal executive and financial
officers have evaluated our disclosure controls and procedures and have
determined that such disclosure controls and procedures are effective as of the
end of the period covered by this report.

          There has been no change in the Company's internal controls over
financial reporting during the quarter ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.

          Management's Report on Internal Control over Financial Reporting and
the Report of the Independent Registered Public Accounting Firm thereon are set
forth in Part II, Item 8 of this report on Form 10-K and are incorporated
herein by reference.

ITEM 9B. OTHER INFORMATION

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

          For information concerning our directors and Executive Officers, see
the information set forth following the caption "PROPOSAL 1: ELECTION OF
DIRECTORS" in the Company's definitive proxy statement to be filed no later than
120 days after the end of the fiscal year covered by this Form 10-K (the "Proxy
Statement"), which information is incorporated herein by reference. For
information concerning our executive officers, see Item 1 appearing in Part I of
this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

          The information set forth following the caption "EXECUTIVE
COMPENSATION" in the Company's Proxy Statement is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The information set forth following the captions "PROPOSAL 1: ELECTION
OF DIRECTORS", "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" and "Equity
Compensation Plan Information" in the Company's Proxy Statement is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information set forth following the captions "PROPOSAL 1: ELECTION
OF DIRECTORS" and "EXECUTIVE COMPENSATION" in the Company's Proxy Statement is
incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

          The information set forth following the caption "Fees Paid to Deloitte
& Touche LLP" in the Company's Proxy Statement is incorporated herein by
reference.


                                       55

<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K


<TABLE>
<CAPTION>
                                                                                                PAGE
                                                                                             REFERENCE
                                                                                             ---------
<S>     <C>                                                                                  <C>
(a)(1)  Financial statements included in this report:
        Management's Report on Internal Control Over Financial Reporting .................       26
        Reports of Independent Registered Public Accounting Firm .........................       27
        Consolidated Balance Sheets at December 31, 2004 and 2003 ........................       29
        Consolidated Statements of Operations for the years ended
          December 31, 2004, 2003 and 2002 ..............................................        30
        Consolidated Statements of Cash Flows for the years ended
          December 31, 2004, 2003 and 2002 ..............................................        31
        Consolidated Statements of Stockholders' Equity and Comprehensive Income
          for the years ended December 31, 2004, 2003 and 2002 ..........................        32
        Notes to Consolidated Financial Statements .......................................       33

(2)     Financial Statement Schedule II-Valuation and Qualifying Accounts and Reserves ...       59
</TABLE>

     All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule or because the information required is included in the consolidated
financial statements or notes thereto.

(3)  Exhibits

Exhibits designated with an "*" are filed, and with an "**" furnished, as an
exhibit to this Annual Report on Form 10-K. Exhibits designated with a "+" are
identified as management contracts or compensatory plans or arrangements.
Exhibits previously filed as indicated below are incorporated by reference.

<TABLE>
<S>     <C> <C>
3.1     -   Restated Certificate of Incorporation of the Company as
            amended by Certificate of Amendment of Articles of
            Incorporation of the Company, dated as of July 8, 1987, and
            Certificate of Amendment to Restated Certificate of
            Incorporation of the Company, dated November 17, 1987. Filed
            as Exhibit 3.1 to the Company's report on Form 10-K for the
            year ended December 31, 1993 and incorporated herein by
            reference.

3.2     -   Certificate of Amendment to Restated Certificate of
            Incorporation of the Company, dated May 23, 2001. Filed as
            Exhibit 3.2 to the Company's Registration Statement on Form
            S-8 dated July 26, 2001 and incorporated herein by
            reference.

3.3*    -   Bylaws of the Company as amended to date.

4.1     -   Rights Agreement, dated as of June 8, 2000, between the
            Company and First Chicago Trust Company of New York, as
            Rights Agent. Filed as Exhibit 4.1 to the Company's report
            on Form 8-A, dated June 15, 2000, and incorporated herein by
            reference.

4.2     -   Amendment to Rights Agreement dated June 8, 2000, by and
            among the Company and First Chicago Trust Company of New
            York and effective as of October 1, 2001. Filed as Exhibit
            4.1 to the Company's report on Form 10-Q for the quarter
            ended September 30, 2001 and incorporated herein by
            reference.

4.3     -   Amendment No. 2 to Rights Agreement by and among the Company
            and EquiServe Trust Company, N.A. and effective as of
            December 31, 2002. Filed as Exhibit 4.3 to the Company's
            report on Form 10-K for the year ended December 31, 2002 and
            incorporated herein by reference.

4.4     -   Form of Indenture between the Company and The Bank of New
            York, as Trustee. Filed as Exhibit 4.1 to the Company's
            Registration Statement on Form S-3 dated August 22, 1997 and
            incorporated herein by reference.
</TABLE>


                                       56

<PAGE>

<TABLE>
<S>     <C> <C>
 4.5    -   Form of Note. Filed as Exhibit 4.2 to Amendment No. 1 to the
            Company's Registration Statement on Form S-3 dated September
            9, 1997 and incorporated herein by reference.

 4.6    -   Form of Note. Filed as Exhibit 4.1 to the Company's report
            on Form 8-K dated February 13, 2001 and incorporated herein
            by reference.

10.1+   -   Smith International, Inc. 1989 Long Term Incentive
            Compensation Plan, as amended to date. Filed as Exhibit 10.1
            to the Company's report on form 10-K for the year ended
            December 31, 2002 and incorporated herein by reference.

10.2+   -   Smith International, Inc. Nonqualified Stock Option
            Agreement as amended to date. Filed as Exhibit 10.2 to the Company's
            report on Form 8-K dated March 14, 2005 and incorporated herein by
            reference.

10.3+   -   Smith International, Inc. Stock Plan for Outside Directors,
            as amended and restated effective April 22, 2003. Filed as
            Exhibit 10.2 to the Company's report on Form 10-K for the
            year ended December 31, 2003 and incorporated herein by
            reference.

10.4+   -   Smith International, Inc. Supplemental Executive Retirement
            Plan, as amended to date. Filed as Exhibit 10.1 to the
            Company's report on Form 10-Q for the quarter ended
            September 30, 2001 and incorporated herein by reference.

10.5+   -   Smith International, Inc. Post-2004 Supplemental Executive
            Retirement Plan. Filed as Exhibit 10.4 to the Company's
            report on Form 8-K dated February 28, 2005 and incorporated
            herein by reference.

10.6+   -   Employment Agreement dated December 10, 1987 between the
            Company and Douglas L. Rock. Filed as Exhibit 10.11 to the
            Company's report on Form 10-K for the year ended December
            31, 1993 and incorporated herein by reference.

10.7+   -   Employment Agreement dated January 2, 1991 between the
            Company and Neal S. Sutton. Filed as Exhibit 10.11 to the
            Company's report on Form 10-K for the year ended December
            31, 1996 and incorporated herein by reference.

10.8+   -   Employment Agreement dated May 1, 1991 between the Company
            and Richard A. Werner. Filed as Exhibit 10.12 to the
            Company's report on Form 10-K for the year ended December
            31, 1996 and incorporated herein by reference.

10.9+   -   Change-of-Control Employment Agreement dated January 4, 2000
            between the Company and Douglas L. Rock. Filed as Exhibit
            10.11 to the Company's report on Form 10-K for the year
            ended December 31, 1999 and incorporated herein by
            reference.

10.10+  -   Change-of-Control Employment Agreement dated January 4, 2000
            between the Company and Neal S. Sutton. Filed as Exhibit
            10.12 to the Company's report on Form 10-K for the year
            ended December 31, 1999 and incorporated herein by
            reference.

10.11+  -   Change-of-Control Employment Agreement dated January 4, 2000
            between the Company and Loren K. Carroll. Filed as Exhibit
            10.14 to the Company's report on Form 10-K for the year
            ended December 31, 1999 and incorporated herein by
            reference.

10.12+  -   Change-of-Control Employment Agreement dated January 4, 2000
            between the Company and Margaret K. Dorman. Filed as Exhibit
            10.15 to the Company's report on Form 10-K for the year
            ended December 31, 1999 and incorporated herein by
            reference.

10.13+  -   Change-of-Control Employment Agreement dated January 4, 2000
            between the Company and John J. Kennedy. Filed as Exhibit
            10.16 to the Company's report on Form 10-K for the year
            ended December 31, 1999 and incorporated herein by
            reference.
</TABLE>


                                       57

<PAGE>

<TABLE>
<S>     <C> <C>
10.14+   -  Change-of-Control Employment Agreement dated January 4, 2000
            between the Company and Roger A. Brown. Filed as Exhibit
            10.17 to the Company's report on Form 10-K for the year
            ended December 31, 1999 and incorporated herein by
            reference.

10.15    -  Credit Agreement dated as of July 10, 2002 among the Company
            and M-I L.L.C., the Lenders parties thereto and Comerica
            Bank, as Administrative Agent, ABN AMRO Bank N.V., as
            Syndication Agent, Den Norske Bank ASA, as Documentation
            Agent, J.P. Morgan Securities Inc., and Credit Lyonnais New
            York Branch, as Co-Lead Arrangers and Joint Bookrunners.
            Filed as Exhibit 10.1 to the Company's report on Form 10-Q
            for the quarter ended September 30, 2002 and incorporated
            herein by reference.

14.     -   Smith International, Inc. Code of Business Conduct and
            Ethics. Filed as Exhibit 14 to the Company's report on Form
            10-K for the year ended December 31, 2003 and incorporated
            herein by reference.

21.1    -   Subsidiaries of the Company. Filed as Exhibit 21.1 to the
            Company's report on Form 10-K for the year ended December
            31, 2002 and incorporated herein by reference.

23.1*   -   Consent of Independent Registered Public Accounting Firm.

31.1*   -   Certification of Chief Executive Officer pursuant to Rule
            13a-14 or 15d-14 of the Securities Exchange Act of 1934, as
            adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
            2002, filed herewith.

31.2*   -   Certification of Chief Financial Officer pursuant to Rule
            13a-14 or 15d-14 of the Securities Exchange Act of 1934, as
            adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
            2002, filed herewith.

32.1**  -   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
            Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished
            herewith.
</TABLE>

(b)  REPORTS ON FORM 8-K

     The Registrant furnished three reports on Form 8-K during the quarterly
period ended December 31, 2004.

     1.   Form 8-K dated December 10, 2004 relating to an amendment to the
          Bylaws of Smith International, Inc. adopted December 8, 2004. The
          document was reported under "Item 5.03. Amendments to Articles of
          Incorporation or Bylaws; Change in Fiscal Year" and "Item 9.01.
          Financial Statements and Exhibits."

     2.   Form 8-K dated December 2, 2004 relating to a press release announcing
          the Company's appointment of Dod A. Fraser to the Smith International,
          Inc. Board of Directors on December 1, 2004. The document was reported
          under "Item 5.02. Departure of Directors or Principal Officers;
          Election of Directors; Appointment of Principal Officers" and "Item
          9.01. Financial Statements and Exhibits."

     3.   Form 8-K dated October 25, 2004 relating to a press release announcing
          the Company's results for the quarter ended September 30, 2004. The
          document was reported under "Item 2.02. Results of Operations and
          Financial Condition" and "Item 9.01. Financial Statements and
          Exhibits."


                                       58

<PAGE>

                                                                     SCHEDULE II

                            SMITH INTERNATIONAL, INC.

`                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                    BALANCE AT   CHARGED                BALANCE
                                     BEGINNING      TO                   AT END
                                      OF YEAR    EXPENSE   WRITE-OFFS   OF YEAR
                                    ----------   -------   ----------   --------
<S>                                 <C>          <C>       <C>          <C>
Allowance for doubtful accounts:
   Year ended December 31, 2004       $12,135     $3,846     $(3,423)    $12,558
   Year ended December 31, 2003        12,338      3,835      (4,038)     12,135
   Year ended December 31, 2002        10,921      9,593      (8,176)     12,338
</TABLE>


                                       59

<PAGE>

                                   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.

                                       SMITH INTERNATIONAL, INC.


March 15, 2005                         By: /s/ DOUG ROCK
                                           -------------------------------------
                                           Doug Rock
                                           Chief Executive Officer,
                                           President and Chief Operating Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the date indicated:

<TABLE>
<S>                                 <C>                                <C>


/s/ DOUG ROCK                       Chairman of the Board,             March 15, 2005
---------------------------------   Chief Executive Officer,
(Doug Rock)                         President and
                                    Chief Operating Officer
                                    (principal executive officer)


/s/ LOREN K. CARROLL                Executive Vice President           March 15, 2005
---------------------------------   and Director
(Loren K. Carroll)


/s/ MARGARET K. DORMAN              Senior Vice President,             March 15, 2005
---------------------------------   Chief Financial Officer
(Margaret K. Dorman)                and Treasurer (principal
                                    financial and accounting officer)


/s/ BENJAMIN F. BAILAR              Director                           March 15, 2005
---------------------------------
(Benjamin F. Bailar)


/s/ G. CLYDE BUCK                   Director                           March 15, 2005
---------------------------------
(G. Clyde Buck)


/s/ DOD A. FRASER                   Director                           March 15, 2005
---------------------------------
(Dod A. Fraser)


/s/ JAMES R. GIBBS                  Director                           March 15, 2005
---------------------------------
(James R. Gibbs)


/s/ JERRY W. NEELY                  Director                           March 15, 2005
---------------------------------
(Jerry W. Neely)
</TABLE>


                                       60
<PAGE>

                                 Exhibit Index

Exhibits designated with an "*" are filed, and with an "**" furnished, as an
exhibit to this Annual Report on Form 10-K. Exhibits designated with a "+" are
identified as management contracts or compensatory plans or arrangements.
Exhibits previously filed as indicated below are incorporated by reference.

<TABLE>
<S>     <C> <C>
 3.1    -   Restated Certificate of Incorporation of the Company as amended by
            Certificate of Amendment of Articles of Incorporation of the
            Company, dated as of July 8, 1987, and Certificate of Amendment to
            Restated Certificate of Incorporation of the Company, dated November
            17, 1987. Filed as Exhibit 3.1 to the Company's report on Form 10-K
            for the year ended December 31, 1993 and incorporated herein by
            reference.

 3.2    -   Certificate of Amendment to Restated Certificate of Incorporation of
            the Company, dated May 23, 2001. Filed as Exhibit 3.2 to the
            Company's Registration Statement on Form S-8 dated July 26, 2001 and
            incorporated herein by reference.

 3.3*   -   Bylaws of the Company as amended to date.

 4.1    -   Rights Agreement, dated as of June 8, 2000, between the Company and
            First Chicago Trust Company of New York, as Rights Agent. Filed as
            Exhibit 4.1 to the Company's report on Form 8-A, dated June 15,
            2000, and incorporated herein by reference.

 4.2    -   Amendment to Rights Agreement dated June 8, 2000, by and among the
            Company and First Chicago Trust Company of New York and effective as
            of October 1, 2001. Filed as Exhibit 4.1 to the Company's report on
            Form 10-Q for the quarter ended September 30, 2001 and incorporated
            herein by reference.

 4.3    -   Amendment No. 2 to Rights Agreement by and among the Company and
            EquiServe Trust Company, N.A. and effective as of December 31, 2002.
            Filed as Exhibit 4.3 to the Company's report on Form 10-K for the
            year ended December 31, 2002 and incorporated herein by reference.

 4.4    -   Form of Indenture between the Company and The Bank of New York, as
            Trustee. Filed as Exhibit 4.1 to the Company's Registration
            Statement on Form S-3 dated August 22, 1997 and incorporated herein
            by reference.
</TABLE>


                                       61

<PAGE>

<TABLE>
<S>     <C> <C>
 4.5    -   Form of Note. Filed as Exhibit 4.2 to Amendment No. 1 to the
            Company's Registration Statement on Form S-3 dated September 9, 1997
            and incorporated herein by reference.

 4.6    -   Form of Note. Filed as Exhibit 4.1 to the Company's report on Form
            8-K dated February 13, 2001 and incorporated herein by reference.

10.1+   -   Smith International, Inc. 1989 Long Term Incentive Compensation
            Plan, as amended to date. Filed as Exhibit 10.1 to the Company's
            report on form 10-K for the year ended December 31, 2002 and
            incorporated herein by reference.

10.2+   -   Smith International, Inc. Nonqualified Stock Option
            Agreement as amended to date. Filed as Exhibit 10.2 to the Company's
            report on Form 8-K dated March 14, 2005 and incorporated herein by
            reference.

10.3+   -   Smith International, Inc. Stock Plan for Outside Directors, as
            amended and restated effective April 22, 2003. Filed as Exhibit 10.2
            to the Company's report on Form 10-K for the year ended December 31,
            2003 and incorporated herein by reference.

10.4+   -   Smith International, Inc. Supplemental Executive Retirement Plan, as
            amended to date. Filed as Exhibit 10.1 to the Company's report on
            Form 10-Q for the quarter ended September 30, 2001 and incorporated
            herein by reference.

10.5+   -   Smith International, Inc. Post-2004 Supplemental Executive
            Retirement Plan. Filed as Exhibit 10.4 to the Company's report on
            Form 8-K dated February 28, 2005 and incorporated herein by
            reference.

10.6+   -   Employment Agreement dated December 10, 1987 between the Company and
            Douglas L. Rock. Filed as Exhibit 10.11 to the Company's report on
            Form 10-K for the year ended December 31, 1993 and incorporated
            herein by reference.

10.7+   -   Employment Agreement dated January 2, 1991 between the Company and
            Neal S. Sutton. Filed as Exhibit 10.11 to the Company's report on
            Form 10-K for the year ended December 31, 1996 and incorporated
            herein by reference.

10.8+   -   Employment Agreement dated May 1, 1991 between the Company and
            Richard A. Werner. Filed as Exhibit 10.12 to the Company's report on
            Form 10-K for the year ended December 31, 1996 and incorporated
            herein by reference.

10.9+   -   Change-of-Control Employment Agreement dated January 4, 2000 between
            the Company and Douglas L. Rock. Filed as Exhibit 10.11 to the
            Company's report on Form 10-K for the year ended December 31, 1999
            and incorporated herein by reference.

10.10+  -   Change-of-Control Employment Agreement dated January 4, 2000 between
            the Company and Neal S. Sutton. Filed as Exhibit 10.12 to the
            Company's report on Form 10-K for the year ended December 31, 1999
            and incorporated herein by reference.

10.11+  -   Change-of-Control Employment Agreement dated January 4, 2000 between
            the Company and Loren K. Carroll. Filed as Exhibit 10.14 to the
            Company's report on Form 10-K for the year ended December 31, 1999
            and incorporated herein by reference.

10.12+  -   Change-of-Control Employment Agreement dated January 4, 2000 between
            the Company and Margaret K. Dorman. Filed as Exhibit 10.15 to the
            Company's report on Form 10-K for the year ended December 31, 1999
            and incorporated herein by reference.

10.13+  -   Change-of-Control Employment Agreement dated January 4, 2000 between
            the Company and John J. Kennedy. Filed as Exhibit 10.16 to the
            Company's report on Form 10-K for the year ended December 31, 1999
            and incorporated herein by reference.
</TABLE>


                                       62

<PAGE>

<TABLE>
<S>     <C> <C>
10.14+  -   Change-of-Control Employment Agreement dated January 4, 2000 between
            the Company and Roger A. Brown. Filed as Exhibit 10.17 to the
            Company's report on Form 10-K for the year ended December 31, 1999
            and incorporated herein by reference.

10.15   -   Credit Agreement dated as of July 10, 2002 among the Company and M-I
            L.L.C., the Lenders parties thereto and Comerica Bank, as
            Administrative Agent, ABN AMRO Bank N.V., as Syndication Agent, Den
            Norske Bank ASA, as Documentation Agent, J.P. Morgan Securities
            Inc., and Credit Lyonnais New York Branch, as Co-Lead Arrangers and
            Joint Bookrunners. Filed as Exhibit 10.1 to the Company's report on
            Form 10-Q for the quarter ended September 30, 2002 and incorporated
            herein by reference.

14.     -   Smith International, Inc. Code of Business Conduct and Ethics. Filed
            as Exhibit 14 to the Company's report on Form 10-K for the year
            ended December 31, 2003 and incorporated herein by reference.

21.1    -   Subsidiaries of the Company. Filed as Exhibit 21.1 to the Company's
            report on Form 10-K for the year ended December 31, 2002 and
            incorporated herein by reference.

23.1*   -   Consent of Independent Registered Public Accounting Firm.

31.1*   -   Certification of Chief Executive Officer pursuant to Rule 13a-14 or
            15d-14 of the Securities Exchange Act of 1934, as adopted pursuant
            to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.2*    -   Certification of Chief Financial Officer pursuant to Rule 13a-14 or
            15d-14 of the Securities Exchange Act of 1934, as adopted pursuant
            to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.1**  -   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
            Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished
            herewith.
</TABLE>


                                       63