<PAGE>

                                  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, 2002

                                       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)

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

  411 NORTH SAM HOUSTON PARKWAY, SUITE 600                         77060
             HOUSTON, TEXAS                                      (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

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

COMMON STOCK, $1.00 PAR VALUE              NEW YORK STOCK EXCHANGE, INC.
                                              PACIFIC EXCHANGE, INC.
    (TITLE OF EACH CLASS)           (NAME OF EACH EXCHANGE ON WHICH REGISTERED)

        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. | |

      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 28, 2002 was $3,347,308,514 (98,161,540 shares at the closing price on the
New York Stock Exchange of $34.10, as adjusted for the two-for-one stock split
effective July 8, 2002). On June 28, 2002, 101,350,038 shares of common stock,
as adjusted for the stock split, 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 101,774,801 shares of common stock outstanding on March 21,
2003.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement related to the Registrant's 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K.

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                             PART I
<S>                                                                                          <C>
Item 1.  Business........................................................................     1
Item 2.  Properties......................................................................     8
Item 3.  Legal Proceedings...............................................................     9
Item 4.  Submission of Matters to a Vote of Security Holders.............................     9
Item 4A. Officers of the Registrant......................................................     9

                                             PART II

Item 5.  Market for the Registrant's Common Stock and Related Security Holder Matters....    10
Item 6.  Selected Financial Data.........................................................    11
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of          12
         Operations......................................................................
Item 8.  Financial Statements and Supplementary Data.....................................    23
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial           53
         Disclosure......................................................................

                                            PART III

Item 10. Directors and Executive Officers of the Registrant..............................    53
Item 11. Executive Compensation..........................................................    53
Item 12. Security Ownership of Certain Beneficial Owners and Management..................    53
Item 13. Certain Relationships and Related Transactions..................................    53
Item 14. Controls and Procedures.........................................................    53

                                             PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................    54
</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 operations are aggregated into two reportable segments:
Oilfield Products and Services and Distribution. The Oilfield Products and
Services segment consists of: M-I, which provides drilling and completion fluid
systems and services, solids-control and separation equipment, waste-management
services and oilfield production chemicals; Smith Bits, 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, fittings, 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 13 of the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K. Information related
to business combinations appears in Note 2 of the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K.

BUSINESS OPERATIONS

OILFIELD PRODUCTS AND SERVICES SEGMENT

M-I

      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 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 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 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.


                                       1
<PAGE>

      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 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 $3.1 billion in 2002, are Baroid Drilling Fluids (a
division of Halliburton Company ("Halliburton")) and INTEQ (a division of Baker
Hughes, Inc. ("Baker Hughes")). While M-I 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 $0.4 billion in
2002, 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.

      SWACO Products and Services. 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. 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. 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 SWACO-manufactured pressure-control equipment to drill
safely and economically 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 safely
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 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). The latter
products represent key advancements in hands-free well pressure control and
underbalanced drilling operations.

      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. SWACO provides
operators with value-added solutions designed to minimize and treat drilling
waste. The Company provides a full suite of waste handling, minimization and
management products and services that includes the recently acquired CLEANCUT(R)
pneumatic conveyance system for collection and transportation of drill cuttings
related to offshore drilling programs. 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,
SWACO provides operators a proven technology for maximizing the recovery of
drilling fluids, while minimizing wastes. SWACO's waste treatment services
encompass a wide range of activities, including site assessment, drill cuttings
injection, water treatment, pit closure and 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.

      SWACO 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.


                                       2
<PAGE>
      Oilfield Production Chemicals. M-I provides a complete 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, LP (a division of Suez) and Champion
Technologies, Inc. Generally, competition is based on product quality, product
performance, technical support and price.

Smith Bits

      Products and Services. Smith Bits is a worldwide leader in the design,
manufacture and marketing of drill bits primarily used in drilling oil and
natural gas wells. In addition, with the acquisition of Sii Neyrfor during July
2002, Smith Bits is the 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 Bits' 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 Bits designs, manufactures and markets three-cone drill bits for the
petroleum industry, ranging in size from 3 1/2 to 28 inches in diameter. 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
Bits is the leading provider of drill bits utilizing diamond-enhanced insert
technology.

      In addition, Smith Bits 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 range in size
from 2 3/4 to 26 inches in diameter.

      Smith Bits 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 and the only drill bit
manufacturer with substantial capabilities in this area. Smith Bits 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, Smith
Bits enjoys 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. Besides the Company, 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 in the drill bit business.
While Smith Bits and these companies supply the majority of the worldwide drill
bit market, which approximated $1.1 billion in 2002, 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.


                                       3
<PAGE>

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 Systems 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 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) drill pipe, and
provides related inspection services, including drill string repair and rebuild
services. These components and their placement in the drill string 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 drill string components. Rotating
drilling heads for flow control in underbalanced drilling applications and
automatic connection torque monitoring and control systems are also 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(TM) Reamer,
REAMASTER(R) and UNDERREAMMING-WHILE-DRILLING ("UWD(TM)") system are three
examples of products that aid the customer in realizing lower drilling costs
through technology. Through the use of the UWD 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 Systems 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 Systems and Multilateral
Junctions through the manufacture of proprietary casing exit tools which are
installed by highly trained technicians. These systems, which include the
patented TRACKMASTER(R)WHIPSTOCK SYSTEM, PACK-STOCK(R), ANCHOR-STOCK(R) and the
MX(TM) 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' patented
DRILLAHEAD(TM) SYSTEM combined with the XITOR GEOTRACK(TM) One-trip Mills,
which mill the casing exit and continue to drill several hundred feet of
formation, provide for a "no trip" system which saves the customer time and
reduces 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 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.


                                       4
<PAGE>

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, fittings, mill, safety and other maintenance products throughout the
world, 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 60 percent of Wilson's 2002 revenues were generated in the
energy segment, which includes exploration and production companies and
companies with operations in the petroleum industry's pipeline segment. The
remainder related to sales in the downstream and industrial market, which
primarily includes refineries, petrochemical 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 McJunkin Corporation, WW Grainger and Hagemeyer NV.
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 53 percent, 48 percent and 51 percent of the Company's revenues in
2002, 2001 and 2000, 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, 64 percent, 59 percent and 60 percent of the Company's
revenues were generated in non-U.S. markets in 2002, 2001 and 2000,
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.

SALES AND DISTRIBUTION

      Sales and service efforts are directed to end users in the drilling and
completion 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 every major oil and
gas producing area of the world. The location of these service centers near the
Company's customers is an important factor in maintaining favorable customer
relations.


                                       5
<PAGE>

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 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 purchases a 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 Bits 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. The
Company purchases a significant amount of tungsten carbide inserts and U.S.
forging requirements from two suppliers under separate supply agreements. The
Company believes that numerous alternative supply sources are available for all
such materials. 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; and Aberdeen, Scotland.

      The Company also maintains a drill bit database which records the
performance of drill bits over the last 17 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. Management believes this proprietary database gives the Company 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 $50.6 million in 2002, $50.8 million
in 2001 and $42.4 million in 2000. In 2002, research and engineering
expenditures approximated 2.2 percent of the Company's Oilfield Products and
Services segment revenues.

      Although the Company has over 1,200 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 or group of patents or upon patent
protection in general.

EMPLOYEES

      At December 31, 2002, the Company had 11,165 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 and several distribution locations of Wilson. The Company
considers its labor relations to be satisfactory.


                                       6
<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.


                                       7
<PAGE>

ITEM 2. PROPERTIES

      The principal facilities and properties utilized by the Company at
December 31, 2002 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                                              82       618,000
  Ponca City, Oklahoma ....          Three-cone drill bits                                  15       207,000
  Florence, Kentucky ......          Separator units, mill units, parts, screens            15       145,000
                                     and motors
  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 and remedial products                   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             5        32,000
                                     and motors
  Scurelle, Italy .........          Diamond drill bits and synthetic diamond                4        31,000
                                     materials
  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
  Mountain Springs, Nevada.          Barite mine                                           900            --
  Westlake, Louisiana .....          Barite processing                                       3            --

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'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. Management 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.


                                       8
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

      Information relating to various commitments and contingencies, including
legal proceedings, is described in Note 14 of the Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K.

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

      Not applicable.

ITEM 4A. 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 during the last five years are stated below. Positions, unless
otherwise specified, are with the Company.

<TABLE>
<CAPTION>
     NAME, AGE AND POSITIONS                            PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
     -----------------------                            -------------------------------------------
<S>                                    <C>
Doug Rock (56)....................     Chairman of the Board; Chief Executive Officer, President and Chief Operating
  Chairman of the Board, Chief           Officer.
  Executive Officer, President
  and Chief Operating Officer

Loren K. Carroll (59)..............    President and Chief Executive Officer of M-I since March 1994; Executive Vice
  Executive Vice President of the        President since October 1992; Chief Financial Officer from October 1992 to April
  Company; President and Chief           1997; member of the Board of Directors since November 1987.
  Executive Officer of M-I

Neal S. Sutton (57)................    Senior Vice President-Administration, General Counsel and Secretary.
  Senior Vice President-
  Administration, General
  Counsel and Secretary

Margaret K. Dorman (39)............    Senior Vice President, Chief Financial Officer and Treasurer since June 1999; Vice
  Senior Vice President,                 President, Controller and Assistant Treasurer from February 1998 to May 1999;
  Chief Financial Officer                Director of Financial Reporting and Planning from December 1995 to February
  and Treasurer                          1998.

Roger A. Brown (57)................    President, Smith Bits since July 1998; President, Smith Diamond Technology from
  President, Smith Bits                  April 1995 to July 1998.

John J. Kennedy (50)...............    President and Chief Executive Officer, Wilson since June 1999; Senior Vice President,
  President and                          Chief Financial Officer and Treasurer from April 1997 to May 1999; Vice  President,
  Chief Executive Officer, Wilson        Chief Accounting Officer and Treasurer from March 1994 to April 1997.

Richard A. Werner (61).............    President, Smith Services.
  President, Smith Services

David R. Cobb (37).................    Vice President and Controller since July 2002; Assistant Controller from  October
  Vice President and Controller          2001 to June 2002; Assistant Treasurer, Kent Electronics Corporation from April
                                         1997 to September 2001.

Alan Simpson (47)...................   Vice President, Human Resources since February 2002; Regional Vice President,
  Vice President, Human Resources        North Latin America of M-I from May 1999 to February 2002; UK Manager of
                                         Dowell Division of Schlumberger Evaluation and Production Services UK Ltd.
                                         from May 1994 to April 1999.
</TABLE>


                                       9
<PAGE>

<TABLE>
<CAPTION>
     NAME, AGE AND POSITIONS                   PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
     -----------------------                   -------------------------------------------
<S>                               <C>
Earl M. Springer (52) ........    Vice President, Business Development since February 1998; Manager of Business Development
  Vice President, Business           from  July 1997 to February 1998;  Manager of Technology Development from August 1994 to
  Development                        July 1997.

Geri D. Wilde (52)............    Vice President, Taxes since February 1998; Director of Taxes from April 1997 to
  Vice President, Taxes and         February 1998; Assistant Treasurer since April 1997; Manager of Taxes and Payroll of M-I
  Assistant Treasurer               from December 1986 to 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.

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.

      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, and adjusted for the two-for-one stock
split effective July 8, 2002.

<TABLE>
<CAPTION>
                                                   COMMON STOCK
                                                --------------------
                                                  HIGH       LOW
                                                ---------  ---------
<S>                                             <C>        <C>

                        2001
                          First Quarter          $42.26     $33.66
                          Second Quarter          42.22      29.89
                          Third Quarter           30.55      16.15
                          Fourth Quarter          28.55      17.15
                        2002
                          First Quarter          $34.94     $23.19
                          Second Quarter          38.72      30.23
                          Third Quarter           36.24      25.79
                          Fourth Quarter          35.95      26.55
</TABLE>

      On March 21, 2003, the Company had 2,265 common stock holders of record
and the last reported closing price on the New York Stock Exchange Composite
Tape was $34.10.

      The Company has not paid dividends on its common stock since the first
quarter of 1986. The determination of the amount of future cash dividends to be
declared and paid on the common stock, if any, will depend upon the Company's
financial condition, earnings and cash flow from operations, the level of its
capital expenditures, its future business prospects and other factors that the
Board of Directors deems relevant.


                                       10
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED DECEMBER 31,
                                        -----------------------------------------------------------------
                                           2002         2001         2000         1999(b)         1998(c)
                                        ----------   ----------   ----------   ----------      ----------
                                                     (In thousands, except per share data)
<S>                                     <C>          <C>          <C>          <C>             <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................   $3,170,080   $3,551,209   $2,761,014   $1,806,153      $2,118,715

Gross profit ........................      918,302    1,045,804      745,169      467,940         629,059

Operating income ....................      256,148      371,510      199,026      149,532         125,309

Net income ..........................       93,189      152,145       72,800       56,724          34,069

Earnings per share - diluted
basis(a) ............................         0.93         1.51         0.72         0.58            0.35

BALANCE SHEET DATA:
Total assets ........................   $2,749,545   $2,735,828   $2,295,287   $1,894,575      $1,758,988

Long-term debt ......................      441,967      538,842      374,716      346,647         368,823

Total stockholders' equity ..........    1,063,535      949,159      817,481      720,220         634,034
</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
2002, 2001 and 2000, and unusual items which may affect the comparability of the
information shown above.

(a)   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.

(b)   In July 1999, the Company completed a transaction with Schlumberger
      Limited related to the combination of certain M-I and Dowell drilling
      fluid operations under a joint venture arrangement. Schlumberger
      contributed its non-U.S. drilling fluid operations and paid cash
      consideration of $280.0 million to the Company in exchange for a 40
      percent minority ownership interest in the combined operations. The
      Company recognized a non-recurring gain of $81.4 million in connection
      with this transaction.

(c)   In 1998, the Company recognized $82.5 million of charges related to
      restructuring efforts and costs associated with the acquisition and
      integration of Wilson Industries, Inc.


                                       11
<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.

      The Company manufactures and markets premium products and services to the
oil and gas exploration and production and petrochemical industries and other
industrial markets. The Company's worldwide operations are largely driven by the
level of exploration and production activity in major energy-producing areas and
the depth and drilling conditions of these projects. Drilling activity levels
are primarily influenced by energy prices but may also be affected by
expectations related to the worldwide supply of and demand for oil and natural
gas, finding and development costs, decline and depletion rates, political
actions and uncertainties, environmental concerns, capital expenditure plans of
exploration and production companies and the overall level of global economic
growth and activity.

      The Company's current year results are expected to be influenced by the
anticipated five percent to ten percent increase in average worldwide activity
levels during 2003 and, to a lesser extent, the acquisition of the oilfield
chemical business of Dynea International, which was completed subsequent to
year-end. The majority of the year-over-year increase in drilling activity is
expected to be reported in North America. Drilling activity in the United States
and Canada is heavily influenced by natural gas fundamentals, as over 80 percent
of the North American rig count is currently natural gas-directed. Natural gas
storage levels in the United States, which were in excess of the historical
five-year average throughout most of 2002, have recently been reduced due to a
combination of declining production and higher weather-related demand. Over the
past twelve months, U.S. natural gas storage levels have declined close to 50
percent, which has contributed to average natural gas prices increasing nearly
threefold. Although, to date, exploration and production companies have not
committed significant capital for new drilling programs, management believes
operators will increase spending throughout 2003 due to the favorable commodity
price environment and the reduction in U.S. natural gas supplies. Drilling
activity in markets outside of North America, which is primarily influenced by
crude oil fundamentals, has remained relatively consistent throughout 2002 and
is not forecasted to increase significantly in 2003. While worldwide activity
levels are currently above the average reported in 2002, various factors,
including political and regional instabilities, oil and natural gas storage
levels, commodity prices and depletion rates, will likely influence drilling
activity on a going forward basis. The Company's business outlook 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. Further weakness in the global
economic environment could result in a substantial decline in worldwide drilling
activity, adversely impacting the Company's future financial results.

      Management also believes the increasing complexity of drilling programs
has resulted in a shift in exploration and production spending toward
value-added, technology-based products, which reduce operators' overall drilling
costs. The Company continues to focus on investing in the development of
technology-based products that considerably improve the drilling process through
increased efficiency and rates of penetration and reduced formation damage.
Management believes the overall savings realized by the use of the Company's
premium products, such as polycrystalline diamond drill bits, diamond-enhanced
three-cone drill bits and synthetic drilling fluids, compensate for the higher
costs of these products over their non-premium counterparts.

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
"expect," "anticipate," "believe," "estimate," "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 factors, 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.


                                       12
<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,
Smith Bits 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. Dollars presented below are in thousands.

<TABLE>
<CAPTION>
                                                               FOR THE YEARS ENDED DECEMBER 31,
                                     ------------------------------------------------------------------------------------
                                                2002                         2001                        2000
                                     --------------------------   --------------------------   --------------------------
                                       AMOUNT         PERCENT       AMOUNT         PERCENT       AMOUNT         PERCENT
                                     -----------    -----------   -----------    -----------   -----------    -----------
<S>                                  <C>            <C>           <C>            <C>           <C>            <C>
REVENUES:

  M-I ............................   $ 1,558,672             49   $ 1,627,600             46   $ 1,236,999             45
  Smith Bits .....................       324,735             10       398,204             11       328,192             12
  Smith Services .................       399,502             13       398,327             11       289,935             10
                                     -----------    -----------   -----------    -----------   -----------    -----------
    Oilfield Products and Services     2,282,909             72     2,424,131             68     1,855,126             67
  Wilson .........................       887,171             28     1,127,078             32       905,888             33
                                     -----------    -----------   -----------    -----------   -----------    -----------

      Total ......................   $ 3,170,080            100   $ 3,551,209            100   $ 2,761,014            100
                                     ===========    ===========   ===========    ===========   ===========    ===========

REVENUES BY AREA:

  United States ..................   $ 1,492,710             47   $ 1,829,378             52   $ 1,349,812             49
  Canada .........................       286,640              9       400,124             11       380,316             14
  Non-North America ..............     1,390,730             44     1,321,707             37     1,030,886             37
                                     -----------    -----------   -----------    -----------   -----------    -----------

      Total ......................   $ 3,170,080            100   $ 3,551,209            100   $ 2,761,014            100
                                     ===========    ===========   ===========    ===========   ===========    ===========

OPERATING INCOME:

  Oilfield Products and Services .   $   266,692             12   $   354,614             15   $   188,017             10
  Distribution ...................        (4,026)            --        22,893              2        16,655              2
  General Corporate ..............        (6,518)             *        (5,997)             *        (5,646)             *
                                     -----------    -----------   -----------    -----------   -----------    -----------

      Total ......................   $   256,148              8   $   371,510             10   $   199,026              7
                                     ===========    ===========   ===========    ===========   ===========    ===========

M-I AVERAGE WORLDWIDE RIG COUNT:

  United States ..................           946             43         1,307             49         1,071             46
  Canada .........................           255             12           330             12           323             14
  Non-North America ..............           989             45         1,040             39           935             40
                                     -----------    -----------   -----------    -----------   -----------    -----------

      Total ......................         2,190            100         2,677            100         2,329            100
                                     ===========    ===========   ===========    ===========   ===========    ===========
</TABLE>

*     not meaningful


                                       13
<PAGE>

Oilfield Products and Services Segment

Revenues

      M-I provides drilling and completion fluid systems, engineering and
technical services to the oil and gas industry through its M-I Fluids division.
M-I's SWACO division manufactures and markets equipment and services for
solids-control, separation, pressure control, rig instrumentation and
waste-management. M-I's business operations are largely influenced by the number
of offshore drilling programs, which are more revenue-intensive than land-based
projects due to the complex nature of the related drilling environment. M-I
reported revenues of $1.6 billion for the year ended December 31, 2002, a
decline of four percent from the prior year period. Excluding the impact of
acquired operations, revenues were ten percent below the prior period and
compared to an 18 percent decline in the average M-I worldwide rig count. The
majority of the base revenue decline was attributable to the lower number of
land-based drilling programs in the Western Hemisphere markets, primarily the
United States, Argentina and Venezuela. Lower sales of synthetic drilling
fluids, related to a 22 percent reduction in the average number of U.S. offshore
drilling projects, accounted for the remainder of the year-to-year variance.
M-I's 2001 revenues of $1.6 billion were 32 percent above the amount reported in
2000. The revenue growth was attributable to a 15 percent increase in worldwide
drilling activity and, to a lesser extent, acquisitions and improved pricing.
After excluding the effect of acquired operations, M-I's 2001 revenues were 22
percent above the prior year level with revenue growth reported in all
geographic regions. The majority of the base-business revenue expansion was
reported in the United States and Europe/Africa due to higher demand for fluid
products and fluid processing services.

      Smith Bits designs, manufactures and sells three-cone drill bits, diamond
drill bits and turbines for use in the oil and gas industry. Prior to the
transfer of its mining bit operations to an unconsolidated joint venture in
October 2001, Smith Bits also supplied drill bits to the mining and construction
industry. For the year ended December 31, 2002, Smith Bits' revenues totaled
$324.7 million. Revenues for the Smith Bits unit, which due to the nature of its
product offerings correlate more closely to the rig count than any of the
Company's other operations, were 18 percent below the prior year and mirrored
the decline in worldwide activity levels. The majority of the revenue variance
resulted from lower unit sales of three-cone bits, reflecting the 28 percent
reduction in U.S. drilling activity. Reduced activity levels in certain Latin
American markets, specifically Colombia, Argentina and Venezuela, accounted for
the remainder of the year-to-year variance. Smith Bits' 2001 revenues totaled
$398.2 million, a 21 percent increase over the 2000 level. Excluding the impact
of mining bit operations, revenues grew 25 percent year-to-year and compared to
a 15 percent increase in the average worldwide rig count. The majority of the
base revenue growth was driven by increased drilling activity in the United
States and Europe/Africa and, to a lesser extent, the impact of improved pricing
and market penetration.

      Smith Services manufactures and markets products and services used in the
oil and gas industry for drilling, workover, well completion and well re-entry.
Smith Services reported revenues of $399.5 million for the year ended December
31, 2002. Revenues were comparable with amounts reported in the prior year
period, as incremental revenues from acquired operations offset a 13 percent
decline in base business volumes. The base revenue reduction primarily reflects
the effect of a 27 percent decline in North American activity levels, which
impacted demand for drilling-related products and services, including tubulars
and inspection services. Smith Services' 2001 revenues totaled $398.3 million, a
37 percent increase over the 2000 level. The significant revenue growth was
attributable to higher worldwide activity levels and new contract awards. Smith
Services' base revenues increased over 2000 levels in all geographic regions,
with approximately two-thirds of the improvement reported in the United States.
On a product basis, over 60 percent of the revenue improvement was attributable
to increased demand for drilling-related products and services, including drill
pipe, tubulars and inspection services.


                                       14
<PAGE>

Operating Income

      Operating income for the Oilfield Products and Services segment was $266.7
million, a 25 percent decline from the prior year period. Segment operating
margins were 12 percent for the year ended December 31, 2002, approximately
three percentage points below the prior year's level. The year-over-year
decrease in segment operating income relates to decreased gross profit,
primarily associated with lower sales volumes, as the Company has experienced
minimal pricing erosion to date. To a lesser extent, decreased demand for
higher-margin products, specifically drill bits and premium drilling fluids
which accounted for over three quarters of the revenue decline, contributed to
the gross profit reduction. Segment operating expenses were comparable with the
prior year, as the effect of lower employee profit-sharing requirements and the
elimination of goodwill amortization was offset by incremental expenses
associated with acquired operations and higher costs incurred under medical and
casualty insurance programs. For the year ended December 31, 2001, segment
operating income increased $166.6 million above the previous year due to higher
gross profit primarily associated with the 31 percent revenue improvement,
partially offset by higher variable-based operating expenses. Segment operating
margins increased to 15 percent in 2001, five percentage points above the prior
year's level. Approximately three-quarters of the year-over-year expansion in
operating margins was attributable to improved gross profit margins, reflecting
improved pricing and the leverage of higher volumes on the Company's
manufacturing and service infrastructure. Operating expenses, as a percentage of
revenues, also declined from 2000 and accounted for the remainder of the margin
expansion.

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 concentrated in the United States and
Canada. The segment has the highest North American revenue exposure of any of
the Company's operations, with 96 percent of Wilson's 2002 revenues generated in
those markets. For the year ended December 31, 2002, Distribution revenues were
$887.2 million, a 21 percent decline from the prior year's level. Over 70
percent of the revenue variance was reported in the energy branch operations
related to a combination of lower North American drilling and completion
activity and reduced Canadian tubular product sales due to increased competition
from steel mills. Lower spending for major maintenance programs and projects by
customers in the U.S. industrial and petrochemical markets contributed to the
remainder of the segment's revenue variance. Wilson's revenues totaled $1.1
billion in 2001, an increase of 24 percent from 2000. The Van Leeuwen
operations, which were acquired in January 2001, contributed approximately
two-thirds of the year-over-year revenue growth. The majority of the eight
percent increase in base-business revenues was reported in the U.S. energy
branch operations, which benefited from higher customer spending on exploration
and production programs and line pipe projects.

Operating Income

      Distribution segment operating income declined $26.9 million from the
amounts reported in 2001. The operating income variance reflects lower gross
profit associated with the reported revenue decline, partially offset by a
reduction in variable-based operating expenses. As a percentage of sales,
operating income decreased two percentage points from the prior year, as lower
sales volumes impacted coverage of fixed sales and administrative support costs.
Wilson's 2001 operating income of $22.9 million was $6.2 million above the level
reported in 2000. Operating income approximated two percent of revenue in 2001,
slightly above the 2000 level due to the impact of the revenue growth on
coverage of sales and administrative support expenses. Gross profit margins were
consistent with the prior year, with an improvement in gross margins in the U.S.
energy branches offset by the effect of a higher proportion of industrial and
downstream revenues, which traditionally generate lower gross profit margins.


                                       15
<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,
                                   ---------------------------------------------------------------------------
                                            2002                      2001                      2000
                                   -----------------------   -----------------------   -----------------------
                                     AMOUNT      PERCENT       AMOUNT      PERCENT       AMOUNT      PERCENT
                                   ----------   ----------   ----------   ----------   ----------   ----------
<S>                                <C>          <C>          <C>          <C>          <C>          <C>
Revenues .......................   $3,170,080          100   $3,551,209          100   $2,761,014          100
                                   ----------   ----------   ----------   ----------   ----------   ----------

Gross profit ...................      918,302           29    1,045,804           29      745,169           27

Operating expenses .............      662,154           21      674,294           19      546,143           20
                                   ----------   ----------   ----------   ----------   ----------   ----------

Operating income ...............      256,148            8      371,510           10      199,026            7
Interest expense, net ..........       38,349            1       42,464            1       34,895            1
                                   ----------   ----------   ----------   ----------   ----------   ----------
Income before income taxes and
  minority interests ...........      217,799            7      329,046            9      164,131            6
Income tax provision ...........       66,632            2      106,397            3       54,998            2
                                   ----------   ----------   ----------   ----------   ----------   ----------
Income before minority
  interests ....................      151,167            5      222,649            6      109,133            4
Minority interests .............       57,978            2       70,504            2       36,333            1
                                   ----------   ----------   ----------   ----------   ----------   ----------

Net income .....................   $   93,189            3   $  152,145            4   $   72,800            3
                                   ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

2002 versus 2001

      Consolidated revenues were $3.2 billion, 11 percent below the prior year's
level. The majority of the revenue reduction was reported in the Company's
Distribution operations, which are concentrated in North America and were
impacted by the significant decline in corresponding activity levels. The
revenue variance was also influenced by the impact of revenues from acquired
operations and, to a lesser extent, the contribution of certain Oilfield segment
operations to an unconsolidated joint venture in the fourth quarter of 2001.
Excluding the net impact of acquired and divested operations, base revenues
declined 15 percent from the prior year, as demand for the Company's products
and services was impacted by a 26 percent reduction in Western Hemisphere
drilling activity. Base revenue growth in the Eastern Hemisphere markets,
attributable to increased activity levels and new contract awards, served to
partially offset the overall revenue decline.

      Gross profit was $918.3 million, 12 percent below the prior year period.
The decrease in gross profit reflects lower sales volumes associated with the
reduction in worldwide activity levels and, to a lesser extent, decreased demand
for higher-margin Oilfield segment products. Gross profit margins for the year
were 29 percent of revenues, comparable with the prior year period. An increased
proportion of Oilfield segment revenues in 2002, which generate higher gross
profit margins than the Distribution operations, served to mask the margin
deterioration reported in the Oilfield segment.

      Operating expenses, consisting of selling, general and administrative
expenses, decreased $12.1 million from the prior year amount. The operating
expense decline was attributable to cost reduction efforts initiated in response
to the decrease in Western Hemisphere activity levels, lower employee
profit-sharing requirements and the elimination of goodwill amortization in
accordance with SFAS No. 142. Incremental expenses from acquired operations and
the increased cost of medical and casualty insurance programs served to
partially offset the overall expense decline. As a percentage of revenues,
operating expenses increased two percentage points, reflecting lower fixed cost
coverage related to the overall sales and administrative functions in both of
the Company's operating segments.

      Net interest expense, which represents interest expense less interest
income, decreased $4.1 million from the prior year. The minimal increase in
average debt levels, primarily related to financing acquisitions in the fourth
quarter of the prior year, was more than offset by the impact of reduced
short-term interest rates on the Company's variable rate debt.


                                       16
<PAGE>

      The effective tax rate approximated 31 percent, which was below both the
32 percent effective rate reported in the prior year and the U.S. statutory
rate. The effective tax rate was lower than the U.S. statutory rate due to the
impact of M-I'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 declined one percentage point from the prior year due to the elimination of
goodwill amortization, a portion of which was not tax deductible, and a
favorable shift in the geographic mix of pre-tax income toward lower rate
jurisdictions.

      Minority interests reflect the portion of the results of majority-owned
operations which are applicable to the minority interest partners. Minority
interests totaled $58.0 million in 2002, a $12.5 million reduction from the
prior year. The decrease reflects the lower profitability of the M-I joint
venture, partially offset by the impact of acquiring a majority interest in
United Engineering Services LLC in the fourth quarter of 2001.

2001 versus 2000

      Consolidated revenues were $3.6 billion, 29 percent above the prior year,
with higher revenue reported across all operating units and geographic regions.
Two-thirds of the improvement was generated by the Company's base operations.
The Company reported organic revenue growth of 19 percent from 2000, comparing
favorably to the 15 percent increase in average worldwide drilling activity. The
majority of the consolidated base revenue growth was reported in the United
States and Europe/Africa. The period-to-period increase in revenues was also
attributable to acquired operations and, to a lesser extent, the impact of
improved pricing and market penetration experienced in the Company's Oilfield
operations.

      Gross profit was $1.0 billion, 40 percent in excess of the prior year due
primarily to the higher reported revenue levels. Gross profit margins rose over
two percentage points to 29 percent of revenues in 2001, reflecting the impact
of price increases and higher sales volumes on fixed cost coverage in the
Oilfield Products and Services segment. A higher proportion of Oilfield segment
revenues in 2001, which generate higher gross profit margins than the
Distribution business, also favorably affected the overall percentage.

      Operating expenses increased $128.2 million, or 24 percent, from the
amount reported in 2000. The majority of the overall increase in operating
expenses was attributable to the expansion in base business volumes, which
contributed to a 16 percent increase in average personnel levels over 2000.
Incremental operating expenses associated with acquired operations contributed
to the higher expense levels, to a lesser extent, accounting for approximately
40 percent of the variance from the prior year. Operating expenses as a
percentage of revenues declined almost one percentage point from 2000,
reflecting higher fixed cost coverage related to the overall sales and
administrative functions in both of the Company's operating segments.

      Net interest expense increased $7.6 million from 2000. Average debt levels
rose $158.9 million year-over-year, reflecting borrowings necessary to finance
15 acquisitions in 2001. The Company's average borrowing rate declined
approximately 70 basis points in 2001, partially offsetting the impact of the
increase in average debt levels on the interest expense variance.

      The effective tax rate approximated 32 percent, which was below both the
34 percent effective rate reported in the prior year and the U.S. statutory
rate. The effective rate was below the U.S. statutory rate due to the impact of
M-I'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 declined
from the prior year, primarily due to a favorable shift in the geographic mix of
pre-tax income toward lower rate jurisdictions.

      Minority interests reflect the portion of the results of majority-owned
operations which are applicable to the minority interest partners. Minority
interests was $70.5 million, an increase of $34.2 million from 2000 reflecting
primarily the improvement in profitability of the M-I joint venture.


                                       17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

General

      At December 31, 2002, cash and cash equivalents equaled $86.8 million.
During 2002, the Company's operations generated $323.5 million of cash flows,
which is $117.8 million above the amount reported in 2001. The improvement is
related to the significant decline in North American drilling activity, which
reduced working capital levels, particularly the required investment in accounts
receivable and inventories.

      In 2002, cash flows used in investing activities totaled $139.2 million,
primarily attributable to capital expenditures and, to a lesser extent, amounts
required to fund acquisitions. During 2002, the Company invested $78.8 million
in property, plant and equipment, net of cash proceeds arising from certain
asset disposals. Projected net capital expenditures for 2003 are expected to
increase to approximately $85.0 million, as higher drilling activity is expected
to impact the level of investment in manufacturing and rental tool equipment.
Capital spending in 2003 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. In addition to the
investment in capital equipment, the Company funded four acquisitions during
2002 for cash consideration of $60.2 million and purchased stock of a
majority-owned subsidiary totaling $0.2 million.

      Cash flows from operations exceeded cash required to fund investing
activities, resulting in repayments of $116.0 million in outstanding
indebtedness. Cash flows used in financing activities, which totaled $142.6
million for 2002, were also impacted by minority partner cash distributions of
$31.6 million and proceeds from the exercise of stock options totaling $5.0
million during the year.

      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. The Company
has various revolving credit facilities in the United States. As of December 31,
2002, the Company had $360.0 million of capacity available under these
facilities for future operating or investing needs. 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 $47.9 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.

      Subsequent to December 31, 2002, M-I acquired certain oilfield chemical
assets of Dynea International in exchange for cash consideration of $78.6
million. The transaction was funded with cash on hand and $37.2 million of
borrowings under the Company's revolving credit agreement. 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.


                                       18
<PAGE>

      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 12, "Employee
Stock Options."

      The Company believes that it has sufficient existing manufacturing
capacity to meet current demand for its products and services. Additionally,
inflation has not had a material effect on the Company in recent years and is
expected to have a modest impact on the operations in the foreseeable future.
The Company has generally been able to offset most of the effects of inflation
through productivity gains, cost reductions and price increases.

Contractual Obligations, Commitments and Contingencies

      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 (in thousands):

<TABLE>
<CAPTION>
                                                             Operating
                                                Debt           Lease
              Period Due                     Maturities     Commitments        Total
              ----------                     ----------     -----------       --------
<S>                                          <C>            <C>               <C>
2003 .................................        $159,692        $ 34,452        $194,144
2004 .................................          19,888          23,064          42,952
2005 .................................          32,152          17,160          49,312
2006 .................................          13,152          12,663          25,815
2007 .................................         156,736           9,766         166,502
Thereafter ...........................         220,039          36,755         256,794
                                              --------        --------        --------
                                              $601,659        $133,860        $735,519
                                              ========        ========        ========
</TABLE>

      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 and performance bonds which totaled $72.4 million at December 31, 2002.
The amount primarily consists of a $25.0 million standby letter of credit,
supporting notes issued in conjunction with the acquisition of CleanCut
Technologies, and various performance bonds, of which $33.1 million expire in
2003. Management does not expect any material amounts to be drawn on these
instruments.

      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. Although the Company believes it is in
substantial compliance with environmental protection laws, estimating the
related liability is difficult considering the continual changes in
environmental regulations and the potential identification of new sites. 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 operations, which are subject
to various indemnifications from former owners. As of December 31, 2002, the
Company has established an environmental reserve of $12.1 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, 2002, 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. In the event that i) the parties
providing the environmental indemnifications 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 establish additional
environmental reserves of up to $25.0 million, impacting earnings and cash flows
in future periods.


                                       19
<PAGE>

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 the
Company 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:

   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.

   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.

   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.

   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.

   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.


                                       20
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

      On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets and modifies the accounting and reporting of
discontinued operations. The adoption of SFAS No. 144 did not have a material
impact on the Company's consolidated financial position or results of operations
for the year ended December 31, 2002.

      On December 31, 2002, the Company adopted the disclosure requirements of
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123.

      On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses the financial accounting
and reporting for retirement obligations and costs associated with tangible
long-lived assets. The adoption of SFAS No. 143 is not expected to have a
material impact on the Company's consolidated financial position or results of
operations for the year ending December 31, 2003.

      From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board ("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 position
or results of operations upon adoption.


                                       21
<PAGE>

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 7, "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, 2002 and
2001. At December 31, 2002, 24 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, 2002, the notional amounts of fair value hedge
contracts and cash flow hedge contracts outstanding were $43.4 million and $31.4
million, respectively, and the fair value exceeded the notional amount of these
contracts by $3.6 million. As of December 31, 2001, the notional amounts of fair
value hedge contracts and cash flow hedge contracts outstanding were $43.1
million and $15.5 million, respectively, and the fair value exceeded the
notional amount of these contracts by $1.4 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.


                                       22
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Below is a copy of the report previously issued by Arthur Andersen LLP, the
Company's former independent public accountants, related to the Company's
consolidated financial statements for the years ended December 31, 2001 and
2000. Arthur Andersen ceased operations in 2002 and is unable to issue an
updated report. Certain financial statements covered by this report have not
been included in the accompanying financial statements.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Smith International, Inc.:

      We have audited the accompanying consolidated balance sheets of Smith
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001 and 2000, 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, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

      We conducted our audits in accordance with auditing standards generally
accepted in the 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Smith
International, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.


ARTHUR ANDERSEN LLP

Houston, Texas
January 29, 2002


                                       23
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheet of Smith
International, Inc. and subsidiaries (the "Company") as of December 31, 2002,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income and cash flows for the year then ended. Our audits also
included the financial statement schedule listed in Part IV, Item 15(a)(2).
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. The consolidated financial statements and financial statement
schedule of the Company as of December 31, 2001 and for each of the two years in
the period ended December 31, 2001, prior to the revisions discussed below, were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those financial statements in their report dated
January 29, 2002.

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

In our opinion, such 2002 consolidated financial statements present fairly, in
all material respects, the financial position of Smith International, Inc. and
subsidiaries as of December 31, 2002, and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
2002 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.

As discussed in Note 1 to the financial statements, effective January 1, 2002,
the Company changed its method of accounting for goodwill and other intangible
assets upon adoption of Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets."

As discussed above, the consolidated financial statements and financial
statement schedule of the Company as of December 31, 2001 and for each of the
two years in the period ended December 31, 2001 were audited by other auditors
who have ceased operations. These financial statements have been revised to i)
give effect to a two-for-one stock split during 2002 (Notes 1, 3, 9 and 12), ii)
include the transitional disclosures required by SFAS No. 142 (Notes 1 and 5),
and iii) include expanded disclosures relating to foreign currency contracts
(Note 7) and the Company's supplemental executive retirement plan (Note 10). We
audited the adjustments, transitional disclosures and expanded disclosures
described above. Our procedures included a) agreeing previously reported
weighted average shares outstanding, stock option, net income and goodwill
amounts to the previously issued financial statements, b) agreeing the
transitional adjustments and expanded disclosure amounts to the Company's
underlying records obtained from management, and c) testing the mathematical
accuracy of the applicable 2001 and 2000 amounts. In our opinion, such
adjustments and disclosures for 2001 and 2000 are appropriate and have been
properly applied. However, we were not engaged to audit, review or apply any
procedures to the 2001 and 2000 consolidated financial statements and financial
statement schedule of the Company other than with respect to such adjustments
and disclosures, and accordingly, we do not express an opinion or any other form
of assurance on the 2001 and 2000 consolidated financial statements and
financial statement schedule taken as a whole.


DELOITTE & TOUCHE LLP

Houston, Texas
February 20, 2003


                                       24
<PAGE>

                            SMITH INTERNATIONAL, INC.

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                      ------------------------
                                                                         2002          2001
                                                                      ----------    ----------
                                                                           (In thousands)
<S>                                                                   <C>           <C>
CURRENT ASSETS:

  Cash and cash equivalents ......................................    $   86,750    $   44,683
  Receivables, less allowance for doubtful accounts of $12,338 and
    $10,921 in 2002 and 2001, respectively .......................       633,918       752,165
  Inventories, net ...............................................       634,488       653,151
  Deferred tax assets, net .......................................        25,403        35,414
  Prepaid expenses and other .....................................        46,355        37,618
                                                                      ----------    ----------

    Total current assets .........................................     1,426,914     1,523,031
                                                                      ----------    ----------

PROPERTY, PLANT AND EQUIPMENT:

  Land ...........................................................        33,412        28,390
  Buildings ......................................................       125,589       100,888
  Machinery and equipment ........................................       506,245       482,045
  Rental tools ...................................................       268,134       243,913
                                                                      ----------    ----------

                                                                         933,380       855,236

  Less-Accumulated depreciation ..................................       414,160       366,739
                                                                      ----------    ----------

  Net property, plant and equipment ..............................       519,220       488,497
                                                                      ----------    ----------

GOODWILL, net of accumulated amortization of $53,586 .............       620,075       574,550

OTHER ASSETS .....................................................       183,336       149,750
                                                                      ----------    ----------

TOTAL ASSETS .....................................................    $2,749,545    $2,735,828
                                                                      ==========    ==========
</TABLE>

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


                                       25
<PAGE>

                            SMITH INTERNATIONAL, INC.

                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                                  ---------------------------
                                                                                      2002            2001
                                                                                  -----------     -----------
                                                                                    (In thousands, except
                                                                                         par value data)
<S>                                                                               <C>             <C>
CURRENT LIABILITIES:

  Short-term borrowings and current portion of long-term debt ................    $   159,692     $   148,693
  Accounts payable ...........................................................        256,069         284,502
  Accrued payroll costs ......................................................         49,946          81,803
  Income taxes payable .......................................................         43,936          41,143
  Other ......................................................................         85,453         109,863
                                                                                  -----------     -----------

    Total current liabilities ................................................        595,096         666,004
                                                                                  -----------     -----------

LONG-TERM DEBT ...............................................................        441,967         538,842

DEFERRED TAX LIABILITIES .....................................................         64,679          40,504

OTHER LONG-TERM LIABILITIES ..................................................         67,011          51,027

MINORITY INTERESTS ...........................................................        517,257         490,292

COMMITMENTS AND CONTINGENCIES (Note 14)

STOCKHOLDERS' EQUITY:

  Preferred stock, $1 par value; 5,000 shares authorized; no shares issued
    or outstanding in 2002 or 2001 ...........................................             --              --
  Common stock, $1 par value; 150,000 shares authorized; 101,546 shares issued
    in 2002 (50,594 shares issued in 2001, on a pre-split basis) .............        101,546          50,594
  Additional paid-in capital .................................................        345,911         389,989
  Retained earnings ..........................................................        655,643         562,454
  Accumulated other comprehensive income .....................................        (10,435)        (24,748)
  Less-Treasury securities, at cost; 2,384 common shares in 2002 (1,192 common
    shares in 2001, on a pre-split basis) ....................................        (29,130)        (29,130)
                                                                                  -----------     -----------

    Total stockholders' equity ...............................................      1,063,535         949,159
                                                                                  -----------     -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................    $ 2,749,545     $ 2,735,828
                                                                                  ===========     ===========
</TABLE>

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


                                       26
<PAGE>

                            SMITH INTERNATIONAL, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                        -------------------------------------------
                                                           2002            2001            2000
                                                        -----------     -----------     -----------
                                                            (In thousands, except per share data)
<S>                                                     <C>             <C>             <C>
Revenues ...........................................    $ 3,170,080     $ 3,551,209     $ 2,761,014

Costs and expenses:
  Costs of revenues ................................      2,251,778       2,505,405       2,015,845
  Selling expenses .................................        520,509         520,004         415,448
  General and administrative expenses ..............        141,645         138,561         119,579
  Goodwill amortization ............................             --          15,729          11,116
                                                        -----------     -----------     -----------
    Total costs and expenses .......................      2,913,932       3,179,699       2,561,988
                                                        -----------     -----------     -----------

Operating income ...................................        256,148         371,510         199,026

Interest expense ...................................         40,928          45,359          36,756
Interest income ....................................         (2,579)         (2,895)         (1,861)
                                                        -----------     -----------     -----------

Income before income taxes and minority
  interests ........................................        217,799         329,046         164,131
Income tax provision ...............................         66,632         106,397          54,998
                                                        -----------     -----------     -----------

Income before minority interests ...................        151,167         222,649         109,133

Minority interests .................................         57,978          70,504          36,333
                                                        -----------     -----------     -----------

Net income .........................................    $    93,189     $   152,145     $    72,800
                                                        ===========     ===========     ===========

Earnings per share:
  Basic ............................................    $      0.94     $      1.53     $      0.73
                                                        ===========     ===========     ===========
  Basic, excluding impact of goodwill amortization .    $      0.94     $      1.62     $      0.81
                                                        ===========     ===========     ===========
  Diluted ..........................................    $      0.93     $      1.51     $      0.72
                                                        ===========     ===========     ===========
  Diluted, excluding impact of goodwill amortization    $      0.93     $      1.61     $      0.80
                                                        ===========     ===========     ===========

Weighted average shares outstanding:
  Basic ............................................         98,984          99,504          99,206
  Diluted ..........................................        100,091         100,448         100,604
</TABLE>

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


                                       27
<PAGE>

                            SMITH INTERNATIONAL, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                     FOR THE YEARS ENDED DECEMBER 31,
                                                                  -------------------------------------
                                                                    2002          2001          2000
                                                                  ---------     ---------     ---------
                                                                             (In thousands)
<S>                                                               <C>           <C>           <C>
Cash flows from operating activities:
  Net income .................................................    $  93,189     $ 152,145     $  72,800
  Adjustments  to reconcile net income to net cash
   provided by operating activities, excluding the net
   effects of acquisitions:
    Depreciation and amortization ............................       89,327        92,895        80,688
    Minority interests .......................................       57,978        70,504        36,333
    Provision for losses on receivables ......................        9,593         2,986         3,277
    Increase (decrease) in LIFO inventory reserves ...........          439        (1,163)        1,339
    Gain on disposal of property, plant and equipment ........       (4,645)       (6,385)       (5,755)
    Foreign currency translation losses (gains) ..............         (864)          889           487
  Changes in operating assets and liabilities:
    Receivables ..............................................      119,600       (31,748)     (156,792)
    Inventories ..............................................       33,675       (33,819)      (38,345)
    Accounts payable .........................................      (32,817)      (35,738)       31,943
    Other current assets and liabilities .....................      (39,756)        4,412        38,739
    Other non-current assets and liabilities .................       (2,193)       (9,213)       (6,994)
                                                                  ---------     ---------     ---------
      Net cash provided by operating activities ..............      323,526       205,765        57,720
                                                                  ---------     ---------     ---------

Cash flows from investing activities:
  Acquisition of businesses, net of cash acquired ............      (60,152)     (248,127)     (145,371)
  Purchases of property, plant and equipment .................      (97,051)     (127,642)      (94,581)
  Proceeds from disposal of property, plant and equipment ....       18,247        18,228        16,705
  Purchases of stock in majority-owned subsidiary ............         (231)       (2,084)           --
                                                                  ---------     ---------     ---------
      Net cash used in investing activities ..................     (139,187)     (359,625)     (223,247)
                                                                  ---------     ---------     ---------

Cash flows from financing activities:
  Proceeds from issuance of long-term debt ...................       15,902       371,250       128,195
  Principal payments of long-term debt .......................     (130,775)     (222,584)      (33,918)
  Net change in short-term borrowings ........................       (1,170)      (26,052)       44,290
  Purchases of treasury stock ................................           --       (21,428)           --
  Proceeds from exercise of stock options ....................        5,047         5,519        18,059
  Contributions from (distributions to) minority interest
    partner ..................................................      (31,600)       55,400        21,600
                                                                  ---------     ---------     ---------
      Net cash provided by (used in) financing activities ....     (142,596)      162,105       178,226
                                                                  ---------     ---------     ---------
Effect of exchange rate changes on cash ......................          324          (106)         (282)
                                                                  ---------     ---------     ---------
Increase in cash and cash equivalents ........................       42,067         8,139        12,417
Cash and cash equivalents at beginning of year ...............       44,683        36,544        24,127
                                                                  ---------     ---------     ---------
Cash and cash equivalents at end of year .....................    $  86,750     $  44,683     $  36,544
                                                                  =========     =========     =========
</TABLE>

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


                                       28
<PAGE>

                            SMITH INTERNATIONAL, INC.

    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                        (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, December 31, 1999 ...............     49,585,911    $    49,586    $   351,397     $   337,509    $   (10,570)
Comprehensive income:
  Net income .............................             --             --             --          72,800             --
  Currency translation adjustments .......             --             --             --              --         (7,223)
                                              -----------    -----------    -----------     -----------    -----------
Comprehensive income .....................             --             --             --          72,800         (7,223)
                                              -----------    -----------    -----------     -----------    -----------
Exercise of stock options ................        833,019            833         30,851              --             --
                                              -----------    -----------    -----------     -----------    -----------
Balance, December 31, 2000 ...............     50,418,930         50,419        382,248         410,309        (17,793)
Comprehensive income:
  Net income .............................             --             --             --         152,145             --
  Currency translation adjustments .......             --             --             --              --         (5,057)
  Changes in unrealized fair value of
    derivatives ..........................             --             --             --              --           (963)
  Minimum pension liability adjustments ..             --             --             --              --           (935)
                                              -----------    -----------    -----------     -----------    -----------
Comprehensive income .....................             --             --             --         152,145         (6,955)
                                              -----------    -----------    -----------     -----------    -----------
Purchases of treasury stock ..............             --             --             --              --             --
Exercise of stock options and stock grants        175,000            175          7,741              --             --
                                              -----------    -----------    -----------     -----------    -----------
Balance, December 31, 2001 ...............     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 9) ..     50,675,019         50,675        (50,675)             --             --
                                              -----------    -----------    -----------     -----------    -----------
Balance, December 31, 2002 ...............    101,545,942    $   101,546    $   345,911     $   655,643    $   (10,435)
                                              ===========    ===========    ===========     ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                 TREASURY SECURITIES
                                              ---------------------------
                                                     COMMON STOCK
                                              ---------------------------        TOTAL
                                               NUMBER OF                     STOCKHOLDERS'
                                                SHARES          AMOUNT          EQUITY
                                              -----------     -----------    ------------
<S>                                           <C>             <C>            <C>
Balance, December 31, 1999 ...............       (655,854)    $    (7,702)    $   720,220
Comprehensive income:
  Net income .............................             --              --          72,800
  Currency translation adjustments .......             --              --          (7,223)
                                              -----------     -----------     -----------
Comprehensive income .....................             --              --          65,577
                                              -----------     -----------     -----------
Exercise of stock options ................             --              --          31,684
                                              -----------     -----------     -----------
Balance, December 31, 2000 ...............       (655,854)         (7,702)        817,481
Comprehensive income:
  Net income .............................             --              --         152,145
  Currency translation adjustments .......             --              --          (5,057)
  Changes in unrealized fair value of
    derivatives ..........................             --              --            (963)
  Minimum pension liability adjustments ..             --              --            (935)
                                              -----------     -----------     -----------
Comprehensive income .....................             --              --         145,190
                                              -----------     -----------     -----------
Purchases of treasury stock ..............       (536,200)        (21,428)        (21,428)
Exercise of stock options and stock grants             --              --           7,916
                                              -----------     -----------     -----------
Balance, December 31, 2001 ...............     (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 9) ..     (1,192,054)             --              --
                                              -----------     -----------     -----------
Balance, December 31, 2002 ...............     (2,384,108)    $   (29,130)    $ 1,063,535
                                              ===========     ===========     ===========
</TABLE>

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


                                       29
<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 U.S.
generally accepted accounting principles 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. 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. All significant
intercompany accounts and transactions have been eliminated.

Audited Financial Information for Periods Prior to Fiscal 2002

      Arthur Andersen LLP ("Arthur Andersen") served as the Company's
independent auditors until their dismissal on April 15, 2002, at which time
Smith's Board of Directors appointed Deloitte & Touche LLP. Accordingly, Arthur
Andersen performed audits of the Company's consolidated financial statements as
of December 31, 2001 and 2000 and for the fiscal years then ended and issued an
unqualified opinion dated January 29, 2002.

      Arthur Andersen ceased operations during 2002 and is unable to consent to
the inclusion of their previously issued opinions on the Company's financial
statements in filings with the Commission. Although the accompanying balance
sheet as of December 31, 2001 and the related consolidated statements of
operations, stockholders' equity and comprehensive income and cash flows for
each of the two years in the period ended December 31, 2001, are not covered by
a current consent from the Company's former independent auditors, management has
included these financial statements in order to provide historical information
as required by the Commission. Management is not aware of any event or
circumstance which would have precluded Arthur Andersen from reissuing their
opinion on the Company's 2000 and 2001 consolidated financial statements.

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 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.


                                       30
<PAGE>

Inventories

      Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out ("FIFO"), last-in, first-out ("LIFO") or average cost
methods. Inventory costs consist of materials, labor and factory overhead.

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. 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 lives of the leases or the estimated useful lives of the
improvements, whichever is shorter. For income tax purposes, accelerated methods
of depreciation are used.

      Costs of major renewals and betterments are capitalized as fixed assets.
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. On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
which addresses financial accounting and reporting matters. In accordance with
SFAS No. 142, the Company discontinued amortizing goodwill to earnings as of
January 1, 2002. The Statement also requires that goodwill be tested for
impairment on an annual basis, or more frequently if circumstances indicate that
an impairment may exist.

      During the first quarter of 2002, the Company completed the transitional
impairment test required by SFAS No. 142 for goodwill recorded as of the
adoption date. The transitional goodwill impairment test involved a comparison
of the fair value of each of the Company's reporting units, as defined, with
their carrying value and resulted in the identification of no impairment.

      The accompanying consolidated statements of operations provide relevant
disclosures related to recorded goodwill amortization and the after-tax impact
which would have resulted from the adoption of SFAS No. 142 as of January 1,
2000.

      The Company amortizes identifiable intangible assets, generally consisting
of patents, trademarks and non-compete agreements, on a straight-line basis over
their expected useful lives, which range from three to 27 years. The adoption of
SFAS No. 142 also required the Company to re-evaluate the remaining useful lives
of its intangible assets to determine whether the periods being used were
appropriate. No changes to the carrying value of the intangibles, nor the
remaining useful lives, were recorded as a result of the review.

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 future cash flows
associated with the asset will be compared to the asset's carrying amount to
determine if an impairment exists.


                                       31
<PAGE>

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.

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 occasionally employs
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.

      On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires that derivatives
be recorded on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The adoption of SFAS No.
133 did not have a material impact on the Company's financial position or
results of operations.

      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. Additionally, the Company
records changes in value related to cash flow hedges, which includes foreign
exchange contracts and interest rate swaps, to accumulated other comprehensive
income.

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.

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 are composed of product sales, rental, service and
other revenues. The Company recognizes product sales revenues upon delivery to
the customer, net of applicable provisions for returns. Rental, service and
other revenues are recorded when such services are performed.

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 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 minority shareholders.


                                       32
<PAGE>

Stock-Based Compensation

      The Company's Board of Directors and its stockholders have authorized an
employee stock option plan. As of December 31, 2002, 6.2 million shares were
issued and outstanding under the program and an additional 3.3 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.

      Certain option awards granted on December 4, 2001 were subject to
stockholder approval which was not obtained until April 24, 2002. Accordingly,
these options were granted with a strike price more than five percent below the
market value on the date of issuance and 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 $0.3 million of related expense in the accompanying
consolidated statement of operations for the year ended December 31, 2002.

      The Company continues 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.

      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>
                                                     2002            2001            2000
                                                 -----------     -----------     -----------
<S>                                              <C>             <C>             <C>
Net income, as reported .....................    $    93,189     $   152,145     $    72,800
  Add:  Stock-based compensation expense
   included in reported income, net of
   related tax effect .......................            182              --              --
  Less:  Total stock-based compensation
   expense determined under the Black-Scholes
   option-pricing model, net of related tax
   effect ...................................         (7,894)         (6,432)         (4,343)
                                                 -----------     -----------     -----------
Pro forma net income ........................    $    85,477     $   145,713     $    68,457
                                                 ===========     ===========     ===========

Earnings per share:
  As reported:
  Basic .....................................    $      0.94     $      1.53     $      0.73
  Diluted ...................................           0.93            1.51            0.72

  Pro forma:
  Basic .....................................    $      0.86     $      1.46     $      0.69
  Diluted ...................................           0.85            1.45            0.68
</TABLE>

      In addition to the stock option program described above, the Company
maintains a stock grant program. The stock grants are issued at par value and
are subject to a four-year cliff-vesting schedule. Compensation expense,
calculated as the difference between the market value on the date of grant and
the exercise price, is being recognized ratably over the vesting period and
resulted in the inclusion of $0.6 million, $0.6 million and $0.5 million of
related expense in the accompanying consolidated statements of operations for
the years ended December 31, 2002, 2001 and 2000, respectively.


                                       33
<PAGE>

Recent Accounting Pronouncements

      On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets and modifies the accounting and reporting of
discontinued operations. The adoption of SFAS No. 144 did not have a material
impact on the Company's consolidated financial position or results of operations
for the year ended December 31, 2002.

      On December 31, 2002, the Company adopted the disclosure requirements of
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123.

      On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses the financial accounting
and reporting for retirement obligations and costs associated with tangible
long-lived assets. The adoption of SFAS No. 143 is not expected to have a
material impact on the Company's consolidated financial position or results of
operations for the year ending December 31, 2003.

      From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board ("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 position
or results of operations upon adoption.


                                       34
<PAGE>

2. BUSINESS COMBINATIONS

      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. Significant 2002
transactions include:

    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 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 acquired IKF Services, a drilling fluids and
    solids-control company located in Russia, for cash consideration of $13.4
    million. In addition, M-I may be obligated to provide additional
    consideration of up to $9.0 million at a future date, dependent upon whether
    terms under the earn-out arrangement are met.

      The excess of the purchase price over the estimated fair value of the net
assets acquired amounted to $35.6 million, which has been recorded as goodwill
in the Oilfield Products and Services segment. Substantially all of the goodwill
related to the 2002 acquisitions is expected to be deductible for tax purposes.
The purchase price allocation related to certain of the 2002 acquisitions is
based upon preliminary information and is subject to change when additional data
concerning the contingent consideration and final asset and liability valuations
is obtained. Material changes in the preliminary allocations are not anticipated
by management.

      During 2001, the Company completed 15 acquisitions in exchange for
aggregate cash consideration of $248.1 million and the assumption of certain
liabilities. On a combined basis, the minority partner in M-I contributed $43.4
million of cash to the joint venture in connection with transactions completed
during the year. Significant 2001 transactions include:

    On January 31, 2001, the Company acquired substantially all of the U.S. net
    assets of Van Leeuwen Pipe and Tube Corporation ("Van Leeuwen") for cash
    consideration of $41.1 million. Van Leeuwen, a leading provider of pipe,
    valves and fittings to the refining, petrochemical and power generation
    industries, has been integrated into the Company's Distribution segment
    operations.

    On August 22, 2001, M-I acquired BW Group plc ("BW Group"), based in
    Scotland, for cash consideration of $20.5 million and the assumption of
    certain indebtedness. BW Group provides drilling and completion fluids and
    related engineering services to the North Sea market.

    On October 2, 2001, M-I acquired The SulfaTreat Company, a natural gas
    production services company headquartered in the United States, for cash
    consideration of $35.0 million.

    On October 23, 2001, M-I acquired the oilfield and industrial screen
    operations of Madison Filter Belgium S.A. ("Madison") for cash consideration
    of $93.5 million. Madison, which includes United Wire Ltd. based in Scotland
    and Southwestern Wire Cloth, Inc. based in the United States, manufactures
    and markets screens for oilfield shakers and provides screening products for
    use in a broad range of industrial markets.

      The excess of the purchase price over the estimated fair value of the net
assets acquired amounted to $137.1 million, which has been recorded as goodwill.
Of this amount, $135.8 million relates to the Oilfield Products and Services
segment and $1.3 million is associated with the Distribution segment. Goodwill
associated with 2001 acquisitions completed prior to July 1 was amortized on a
straight-line basis over a 20-year period; however, goodwill related to
transactions completed subsequent to that date was not amortized in accordance
with the provisions of SFAS No. 142.


                                       35
<PAGE>

      During 2000, the Company acquired six operations in exchange for aggregate
cash consideration of $145.4 million and the assumption of certain liabilities.
The minority partner in M-I contributed $21.6 million of cash to the joint
venture in connection with an acquisition. Significant 2000 transactions
include:

    On January 15, 2000, the Company acquired Texas Mill Supply and
    Manufacturing, Inc. ("Texas Mill") in exchange for cash consideration of
    $30.0 million. Texas Mill was a U.S.-based provider of industrial mill and
    safety products and management services primarily to the refining, power
    generation and petrochemical markets.

    On November 30, 2000, M-I acquired the drilling fluids and solids-control
    assets of Bolland & Cia. S.A., based in Argentina, for cash consideration of
    $25.5 million.

    On December 15, 2000, M-I acquired the Sweco Division of Emerson ("Sweco")
    for cash consideration of $75.0 million. Sweco manufactures, markets and
    services specialty separation equipment for oilfield applications and a
    broad range of industrial markets.

      The excess of the purchase price over the estimated fair value of the net
assets acquired amounted to $111.9 million, which has been recorded as goodwill.
Of this amount, $95.3 million relates to the Oilfield Products and Services
segment and $16.6 million is associated with the Distribution segment. Goodwill
associated with 2000 acquisitions was amortized on a straight-line basis over a
20-year period.

      The following unaudited pro forma supplemental information presents
consolidated results of operations as if the Company's significant current and
prior year acquisitions had occurred on January 1, 2001. The unaudited pro forma
data is based on historical information and does not include estimated cost
savings; therefore, it does not purport to be indicative of the results of
operations had the combinations been in effect at the dates indicated or of
future results for the combined entities (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                     2002               2001
                                                -------------      -------------
<S>                                             <C>                <C>
Revenues .................................      $   3,205,194      $   3,680,175

Net income ...............................             96,211            156,161
Earnings per share:
          Basic ..........................      $        0.97      $        1.57
          Diluted ........................               0.96               1.55
</TABLE>

      The following schedule summarizes investing activities related to 2002,
2001 and 2000 acquisitions included in the consolidated statements of cash
flows:

<TABLE>
<CAPTION>
                                                           2002         2001          2000
                                                        ---------    ---------     ---------
<S>                                                     <C>          <C>           <C>
Fair value of tangible and  identifiable  intangible
  assets, net of cash acquired .....................    $  57,480    $ 195,500     $  91,167
Goodwill recorded ..................................       35,616      137,100       111,892
Total liabilities and minority interests assumed ...      (32,944)     (84,473)      (57,688)
                                                        ---------    ---------     ---------
Cash paid for acquisition of businesses, net of
  cash acquired ....................................    $  60,152    $ 248,127     $ 145,371
                                                        =========    =========     =========
</TABLE>


                                       36
<PAGE>

3. 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.

      During 2002, the Company's Board of Directors approved a two-for-one stock
split effected in the form of a stock dividend. All prior year weighted average
share and option amounts have been restated for the effect of the stock split.

      Outstanding employee stock options of 1.7 million and 0.4 million as of
December 31, 2002 and 2001, respectively, were not included in the computation
of diluted earnings per common share as the exercise price was greater than 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>
                                       2002        2001        2000
                                     --------    --------    --------
<S>                                  <C>         <C>         <C>
BASIC EPS:
Net income ......................    $ 93,189    $152,145    $ 72,800
                                     ========    ========    ========

Weighted average number of common
  shares outstanding ............      98,984      99,504      99,206
                                     ========    ========    ========

Basic EPS .......................    $   0.94    $   1.53    $   0.73
                                     ========    ========    ========

DILUTED EPS:
Net income ......................    $ 93,189    $152,145    $ 72,800
                                     ========    ========    ========

Weighted average number of common
  shares outstanding ............      98,984      99,504      99,206
Dilutive effect of stock options.       1,107         944       1,398
                                     --------    --------    --------
                                      100,091     100,448     100,604
                                     ========    ========    ========

Diluted EPS .....................    $   0.93    $   1.51    $   0.72
                                     ========    ========    ========
</TABLE>


                                       37
<PAGE>

4. INVENTORIES

      Inventories consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                 2002          2001
                                                              ---------     ---------
<S>                                                           <C>           <C>
Raw materials ............................................    $  49,880     $  50,821
Work-in-process ..........................................       54,201        65,008
Products purchased for resale ............................      155,202       154,787
Finished goods ...........................................      399,252       406,143
                                                              ---------     ---------
                                                                658,535       676,759
Reserves to state certain U.S. inventories (FIFO cost of
  $265,304 and $276,031 in 2002 and 2001, respectively) on
  a LIFO basis ...........................................      (24,047)      (23,608)
                                                              ---------     ---------
                                                              $ 634,488     $ 653,151
                                                              =========     =========
</TABLE>

5. GOODWILL AND OTHER INTANGIBLE ASSETS

      The following schedule presents goodwill, net of amortization, on a
segment basis as of December 31, 2002 and 2001 and the related changes in the
carrying amount of goodwill:

<TABLE>
<CAPTION>
                                         Oilfield       Distribution
                                          Segment         Segment       Consolidated
                                        -----------     -----------     ------------
<S>                                     <C>             <C>             <C>
Balance as of December 31, 2000 ....    $   415,593     $    38,354     $   453,947
Goodwill acquired ..................        135,800           1,300         137,100
Purchase price and other adjustments            313          (1,081)           (768)
Amortization .......................        (14,197)         (1,532)        (15,729)
                                        -----------     -----------     -----------
Balance as of December 31, 2001 ....        537,509          37,041         574,550
Goodwill acquired ..................         35,616              --          35,616
Purchase price and other adjustments          9,661             248           9,909
                                        -----------     -----------     -----------
Balance as of December 31, 2002 ....    $   582,786     $    37,289     $   620,075
                                        ===========     ===========     ===========
</TABLE>

      The accompanying consolidated balance sheets as of December 31, 2002 and
2001 include $60.1 million and $31.1 million of intangible assets (net of
accumulated amortization of $13.2 million and $10.0 million), respectively,
which are classified in other assets. Amortization expense related to intangible
assets for the years ended December 31, 2002, 2001 and 2000 amounted to $3.2
million, $2.1 million and $1.3 million, respectively.


                                       38
<PAGE>

6. DEBT

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

<TABLE>
<CAPTION>
                                                                                                   2002          2001
                                                                                                ---------     ---------
<S>                                                                                             <C>           <C>
CURRENT:
  Short-term borrowings ....................................................................    $  49,978     $  50,156
  Current portion of long-term debt ........................................................      109,714        98,537
                                                                                                ---------     ---------
    Short-term borrowings and current portion of long-term debt ............................    $ 159,692     $ 148,693
                                                                                                =========     =========
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 $840 and $1,084
    in 2002 and 2001, respectively) ........................................................    $ 219,160     $ 248,916

  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 $485 and
    $589 in 2002 and 2001, respectively) ...................................................      149,515       149,411

  Floating Rate Senior Notes maturing October 2003. Interest payable  quarterly at
    adjusted LIBOR as defined (2.90% at December 31, 2002) and described  below (presented
    net of unamortized discount of $127 and $295 in 2002 and 2001, respectively) ...........       74,873        74,705

  7.7% Senior Secured Notes maturing July 2007. Principal due in equal annual
    installments of $7.1 million.  Interest payable semi-annually ..........................       35,714        42,857

  7.63% Notes payable to insurance companies maturing  April 2006. Principal due in
    equal annual installments of $3.3 million. Interest payable semi-annually ..............       13,333        16,666

  Notes payable to various individuals maturing September 2004. Interest payable quarterly
    at adjusted LIBOR as defined (1.27% at December 31, 2002) and described  below .........       23,854            --

  Bank revolvers payable:
  $250.0 million  revolving note expiring July 2005.  Interest payable quarterly at base
    rate (4.25% at December 31, 2002) or Eurodollar rate, as defined (2.07% at
    December 31, 2002) and described below (replaced $120.0 million facility
    which was terminated in 2002) ..........................................................       15,000        50,800

  M-I $150.0 million revolving note expiring July 2005. Interest payable quarterly at base
    rate (4.25% at December 31, 2002) or Eurodollar rate, as defined (2.07% at
    December 31, 2002) and described below (replaced $80.0 million facility
    which was terminated in 2002) ..........................................................           --        30,900

  Term loans and other .....................................................................       20,232        23,124
                                                                                                ---------     ---------
                                                                                                  551,681       637,379
  Less-Current portion of long-term debt ...................................................     (109,714)      (98,537)
                                                                                                ---------     ---------
    Long-term debt .........................................................................    $ 441,967     $ 538,842
                                                                                                =========     =========
</TABLE>

      Principal payments of long-term debt for years subsequent to 2003 are as
follows:

<TABLE>
<S>                                                               <C>
             2004...........................................      $     19,888
             2005...........................................            32,152
             2006...........................................            13,152
             2007...........................................           156,736
             Thereafter.....................................           220,039
                                                                  -------------
                                                                  $    441,967
                                                                  =============
</TABLE>


                                       39
<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 $97.9 million. At
December 31, 2002, $47.9 million of additional borrowing capacity was available
under these facilities. These borrowings had a weighted average interest rate of
eight percent at December 31, 2002 and 2001.

      The 6.75 percent, 7.0 percent and Floating Rate 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's Floating Rate Senior Notes accrue
interest based on a variable rate, subject to quarterly adjustments, equal to
LIBOR plus 112.5 basis points and have no redemption feature.

      In July 2002, the Company terminated its existing revolving credit
facility, which was scheduled to expire in December 2002, and replaced it with
an unsecured facility provided by a syndicate of nine financial institutions.
The new revolving credit agreement (the "Agreement"), which expires July 2005,
includes a $400.0 million committed line of credit with a $25.0 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, 2002, the Company had $15.0 million drawn and
$25.0 million of letters of credit issued under the facility, resulting in
additional borrowing capacity of $360.0 million.

      In October 2002, the Company issued $23.9 million of notes payable to
certain former shareholders in connection with the CleanCut transaction. The
majority of the notes, which mature in September 2004, include callable
provisions at the option of the noteholder beginning April 2003. These notes
have been properly classified as short-term borrowings in the accompanying
consolidated balance sheet.

      The Company was in compliance with its loan covenants under the various
loan indentures, as amended, at December 31, 2002.

      Interest paid during the years ended December 31, 2002, 2001 and 2000,
amounted to $41.2 million, $39.4 million and $35.4 million, respectively.


                                       40
<PAGE>

7. FINANCIAL INSTRUMENTS

Foreign Currency Contracts

      From time to time, the Company enters into spot and forward contracts as a
hedge against foreign currency denominated assets and liabilities and foreign
currency commitments. The terms of these contracts generally do not exceed two
years. For fair value hedges, settlement and market value gains and losses are
recognized currently through earnings, and the resulting amounts generally
offset foreign exchange gains or losses on the related accounts. Gains or losses
on designated cash flow hedge contracts are deferred to accumulated other
comprehensive income. As of December 31, 2002, the notional amounts of fair
value hedge contracts and cash flow hedge contracts outstanding were $43.4
million and $31.4 million, respectively, and the fair value exceeded the
notional amount of these contracts by $3.6 million. As of December 31, 2001, the
notional amounts of fair value hedge contracts and cash flow hedge contracts
outstanding were $43.1 million and $15.5 million, respectively, and the fair
value exceeded the notional amount of these contracts by $1.4 million.

Fair Value of Other Financial Instruments

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

<TABLE>
<CAPTION>
                                               2002                            2001
                                   -----------------------------   -----------------------------
                                     Recorded          Fair          Recorded          Fair
                                      Value           Value           Value           Value
                                   -------------   -------------   -------------   -------------
<S>                                <C>             <C>             <C>             <C>
Long-term debt...............       $  551,681      $ 597,143       $  637,379      $   649,329
</TABLE>


      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.

8. INCOME TAXES

      The geographical sources of income before income taxes and minority
interests for the three years ended December 31, 2002 were as follows:


<TABLE>
<CAPTION>
                                            2002           2001           2000
                                          --------       --------       --------
<S>                                       <C>            <C>            <C>
Income before income taxes
  and minority interests:
  United States ...................       $ 40,198       $174,223       $ 74,681
  Non-United States ...............        177,601        154,823         89,450
                                          --------       --------       --------

  Total ...........................       $217,799       $329,046       $164,131
                                          ========       ========       ========
</TABLE>

      The income tax provision is summarized as follows:

<TABLE>
<CAPTION>
                                            2002           2001           2000
                                          --------       --------       --------
<S>                                       <C>            <C>            <C>
Current:
  United States ...................       $ (3,027)      $ 57,553       $ 12,111
  Non-United States ...............         44,260         46,226         23,138
  State ...........................          1,839          3,774            146
                                          --------       --------       --------
                                            43,072        107,553         35,395
                                          --------       --------       --------
Deferred:
  United States ...................         18,738         (5,341)        11,601
  Non-United States ...............          4,822          4,185          8,002
                                          --------       --------       --------
                                            23,560         (1,156)        19,603
                                          --------       --------       --------
Income tax provision ..............       $ 66,632       $106,397       $ 54,998
                                          ========       ========       ========
</TABLE>


                                       41
<PAGE>

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

<TABLE>
<CAPTION>
                                                                2002        2001        2000
                                                              ------      ------      ------
<S>                                                           <C>         <C>         <C>
U.S. federal statutory tax rate ..........................      35.0%       35.0%       35.0%
Minority partner's share of U.S. partnership earnings ....      (3.6)       (4.3)       (4.3)
Non-deductible expenses ..................................       0.7         1.7         1.9
Benefit of foreign sales corporation and
 extraterritorial income exclusion .......................      (0.7)       (1.1)       (0.6)
State taxes, net .........................................       0.8         1.1         0.1
Non-U.S. tax provisions which vary from the U.S.
 rate/non-U.S. losses with no tax benefit realized .......      (1.2)         --         1.6
Other items, net .........................................      (0.5)       (0.1)       (0.2)
                                                              ------      ------      ------
Effective tax rate .......................................      30.5%       32.3%       33.5%
                                                              ======      ======      ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                       2002         2001
                                                     --------     --------
<S>                                                  <C>          <C>
Deferred tax liabilities attributed to the excess
of net book basis over remaining tax basis
(principally depreciation):
    United States ...............................    $(50,727)    $(36,459)
    Non-United States ...........................     (38,225)     (19,523)
                                                     --------     --------
  Total deferred tax liabilities ................     (88,952)     (55,982)
                                                     --------     --------

Deferred tax assets attributed to net operating
loss and tax credit carryforwards:
    United States ...............................       2,088           --
    Non-United States ...........................      21,817       27,261

Other deferred tax assets (principally accrued
liabilities not deductible until paid
and inventories):
    United States ...............................      41,868       52,442
    Non-United States ...........................       2,249          880
                                                     --------     --------
      Subtotal ..................................      68,022       80,583

Valuation allowance .............................     (18,916)     (28,778)
                                                     --------     --------

  Total deferred tax assets .....................      49,106       51,805
                                                     --------     --------

      Net deferred tax liabilities ..............    $(39,846)    $ (4,177)
                                                     ========     ========

Balance sheet presentation:

  Deferred tax assets, net ......................    $ 25,403     $ 35,414
  Other assets ..................................       6,263        5,862
  Other current liabilities .....................      (6,833)      (4,949)
  Deferred tax liabilities ......................     (64,679)     (40,504)
                                                     --------     --------
      Net deferred tax liabilities ..............    $(39,846)    $ (4,177)
                                                     ========     ========
</TABLE>


                                       42
<PAGE>

      Total foreign operating loss carryforwards at December 31, 2002, resulted
in a deferred tax asset of approximately $21.8 million, of which $14.9 million
has been offset by recording a valuation reserve. These losses are available to
reduce the future tax liabilities of their respective foreign entities.
Approximately $11.4 million of these losses will carryforward indefinitely,
while the remaining losses expire at various dates. U.S. foreign tax credit
carryforwards of $2.1 million are available to reduce taxes through 2007. The
Company's valuation allowance was reduced by $9.9 million in 2002 and $3.5
million in 2001, primarily due to the expiration of net operating loss and tax
credit carryforwards outside the United States.

      Income taxes paid during the years ended December 31, 2002, 2001 and 2000,
amounted to $39.7 million, $87.9 million and $23.0 million, respectively.

      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
$47.9 million at December 31, 2002, 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.

9. STOCKHOLDERS' EQUITY

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 prior year share and option amounts included
in the accompanying consolidated financial statements and related notes have
been restated for the effect of the stock split.

Treasury Share Repurchases

      During 2001, the Company's Board of Directors authorized a share buyback
program which allows for the repurchase of up to five million shares of common
stock, subject to regulatory issues, market considerations and other factors.
During 2001, the Company repurchased 536,200 shares, on a pre-split basis, of
common stock at an aggregate cost of $21.4 million. The acquired shares, as
adjusted for the two-for-one stock split, 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.

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.


                                       43
<PAGE>

Accumulated Other Comprehensive Income

      As of December 31, 2002, accumulated other comprehensive income in the
accompanying consolidated balance sheet includes $9.2 million of cumulative
currency translation losses and $3.5 million of cumulative minimum pension
liability adjustments, partially offset by $2.3 million of cumulative changes in
unrealized fair value of derivatives. Approximately $2.0 million of the
cumulative changes in unrealized fair value of derivatives is expected to be
recognized as after-tax earnings during the fiscal year ending December 31,
2003.

10. RETIREMENT PLANS

Defined Contribution Plans

      The Company established the Smith International, Inc. 401(k) Retirement
Plan (the "Plan") for the benefit of all eligible employees. Employees may
voluntarily contribute up to 12 percent of compensation, as defined, to the
Plan. The Company makes retirement, matching and, in certain cases,
discretionary matching contributions to each participant's account under the
Plan. Participants receive a full match of the first 1 1/2 percent of their
contributions along with a retirement contribution ranging from two percent to
six percent of their qualified compensation. In addition, the Board of Directors
may provide discretionary matching contributions based upon financial
performance to participants who are employed by the Company on December 31.

      M-I has a Company Profit-Sharing and Savings Plan (the "M-I Plan") under
which participating employees may contribute up to 15 percent of their
compensation, as defined. Under the terms of the M-I Plan, qualified employees
are eligible to receive basic, matching and profit-sharing contributions with
the approval of the Employee Benefits Committee and, in certain instances, the
Board of Directors. Participants are eligible to receive a basic contribution
equal to three percent of qualified compensation, and a full match of the first
1 1/2 percent of their contributions. In addition, the Board of Directors may
provide discretionary profit-sharing contributions based upon financial
performance to participants who are employed by M-I on December 31.

      The Company recognized expense totaling $17.6 million, $25.5 million and
$20.7 million in 2002, 2001 and 2000, 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, 2002, 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, up 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,
2002 and 2001, $30.6 million and $25.5 million, respectively, are included in
other assets with a corresponding amount recorded in other long-term
liabilities.

      During the years ended December 31, 2002, 2001 and 2000, Company
contributions to the plan totaled $1.9 million, $1.1 million and $0.7 million,
respectively.


                                       44
<PAGE>

11. EMPLOYEE BENEFIT PLANS

Pension Plans

      The Company currently maintains various pension plans covering certain
U.S. and non-U.S. employees. In connection with the Van Leeuwen transaction, the
Company assumed certain pension obligations related to its employees. Future
benefit accruals and the addition of new participants under the U.S. plans were
frozen prior to 1998.

Postretirement Benefit Plans

      The Company and its subsidiaries provide limited health care benefits for
retired employees. Many employees who retire from the Company are eligible for
these benefits.

      The Smith International, Inc. Retiree Medical Plan ("Smith Medical Plan")
provides postretirement medical benefits to retirees and their spouses. The
retiree medical plan has annual and lifetime limitations on the dollar amount of
the Company's portion of the cost of benefits incurred by retirees under the
Smith Medical Plan. The remaining cost of benefits in excess of the annual or
lifetime limitation is the responsibility of the participants.

      M-I provides medical coverage to eligible retirees and their dependents
under the M-I Drilling Fluids Retiree Medical Plan ("M-I Medical Plan").
Eligibility for inclusion in that plan, however, was closed as of January 1,
1994, to the majority of M-I's employees. M-I contributes to the cost of
benefits under this plan; however, these costs are reviewed annually for
inflation, and limited to a maximum five percent increase in M-I's contribution
per year. Any costs in excess of M-I's maximum contribution are the
responsibility of the retirees or their dependents.

      Although Wilson provides postretirement medical coverage to eligible
retirees and their spouses, new employees have not been eligible for inclusion
under this program since January 1986. Eligible individuals are able to continue
primary medical coverage under Wilson's group insurance program until reaching
the age of 65 at which time such coverage becomes secondary for participants
electing to remain in the program. Participating retirees are required to
contribute a portion of the insurance premiums under the program with Wilson
responsible for any costs in excess of those contributions.


                                       45
<PAGE>

      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>
                                                                            POSTRETIREMENT
                                                   PENSION PLANS            BENEFIT PLANS
                                               ---------------------     ---------------------
                                                 2002         2001         2002         2001
                                               --------     --------     --------     --------
<S>                                            <C>          <C>          <C>          <C>
Changes in benefit obligations:
  Benefit obligations at beginning of year     $ 16,251     $ 12,320     $ 15,709     $ 13,657
  Service cost ............................          11           --          220          221
  Interest cost ...........................       1,145          731          981          993
  Plan participants' contributions ........          --           --          624          522
  Actuarial loss (gain) ...................         789          486       (4,084)       1,821
  Plan amendments .........................          --           --       (1,435)          --
  Business acquisition ....................          --        4,872           --           --
  Plan settlements ........................          --       (1,720)          --           --
  Benefits paid ...........................        (889)        (438)      (1,434)      (1,505)
                                               --------     --------     --------     --------
  Benefit obligations at end of year ......    $ 17,307     $ 16,251     $ 10,581     $ 15,709
                                               ========     ========     ========     ========

Changes in plan assets:
  Fair value of plan assets at beginning
  of year .................................    $ 13,288     $ 11,879     $     --     $     --
  Actual return on plan assets ............      (1,164)         229           --           --
  Employer contributions ..................       2,505           --          810          983
  Plan participants' contributions ........          --           --          624          522
  Business acquisition ....................          --        3,338           --           --
  Plan settlements ........................          --       (1,720)          --           --
  Benefits paid ...........................        (889)        (438)      (1,434)      (1,505)
                                               --------     --------     --------     --------
  Fair value of plan assets at end of year     $ 13,740     $ 13,288     $     --     $     --
                                               ========     ========     ========     ========

  Funded status ...........................    $ (3,567)    $ (2,963)    $(10,581)    $(15,709)
  Unrecognized net actuarial loss (gain) ..       5,073        2,004       (4,425)        (584)
  Unrecognized prior service cost .........          --           --       (2,281)      (1,089)
                                               --------     --------     --------     --------
  Prepaid benefit (accrued liability) .....    $  1,506     $   (959)    $(17,287)    $(17,382)
                                               ========     ========     ========     ========
</TABLE>

      Assumptions used for financial reporting purposes to compute net benefit
expense and its components are as follows:

<TABLE>
<CAPTION>
                                                           PENSION PLANS                  POSTRETIREMENT BENEFIT PLANS
                                                 ---------------------------------     ----------------------------------
                                                  2002         2001         2000         2002         2001         2000
                                                 -------      -------      -------      -------      -------      -------
<S>                                              <C>          <C>          <C>          <C>          <C>          <C>
Weighted average assumptions:
  Discount rate .............................       6.75%        7.25%        7.40%        6.75%        7.25%     7.26%-7.40%
  Expected return on plan assets ............       8.50%        8.50%        8.50%         N/A          N/A          N/A

Components of net periodic benefit expense:
  Service cost ..............................    $    11      $    50      $    --      $   220      $   221      $   248
  Interest cost .............................      1,145        1,061          898          981          993        1,066
  Return on plan assets .....................       (988)        (887)        (742)          --           --           --
  Amortization of prior service cost ........         --           --           --         (243)        (234)        (234)
  Amortization of loss (gain) ...............         73          260       (1,319)        (243)        (350)        (125)
                                                 -------      -------      -------      -------      -------      -------
  Net periodic benefit expense (credit) .....    $   241      $   484      $(1,163)     $   715      $   630      $   955
                                                 =======      =======      =======      =======      =======      =======
</TABLE>


                                       46
<PAGE>

      The health care cost trend rate assumption can have a significant effect
on the amounts reported. An increase of one percentage point in the health care
cost trend rate would increase the accumulated postretirement benefit obligation
and the aggregate of the service and interest cost components of the
postretirement benefits expense by $0.4 million and $0.1 million, respectively.
A decrease of one percentage point in the health care cost trend rate would
decrease the accumulated postretirement benefit obligation and the aggregate of
the service and interest cost components of the postretirement benefits expense
by $0.6 million and $0.1 million, respectively.

12. EMPLOYEE STOCK OPTIONS

      A summary of the Company's stock option program is presented below.
Historical balances have been restated for the impact of the two-for-one stock
split.

<TABLE>
<CAPTION>
                                              SHARES         WEIGHTED AVERAGE
                                           UNDER OPTION       EXERCISE PRICE
                                           ------------      ---------------
<S>                                        <C>               <C>
Outstanding at December 31, 1999 ...         4,978,580         $    15.69

Options granted ....................         1,063,820              30.68
Options forfeited ..................           (72,980)             21.98
Options exercised ..................        (1,666,038)             10.59
                                            ----------         ----------

Outstanding at December 31, 2000 ...         4,303,382              21.31

Options granted ....................         1,266,600              23.50
Options forfeited ..................           (59,184)             19.54
Options exercised ..................          (342,000)             16.13
                                            ----------         ----------

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
                                            ==========         ==========
</TABLE>

      The number of outstanding fixed stock options exercisable at December 31,
2001 and 2000 was 2,344,510 and 1,650,614, respectively. These options had a
weighted average exercise price of $20.46 and $18.99 at December 31, 2001 and
2000, respectively. The following summarizes information about fixed stock
options outstanding at December 31, 2002:

<TABLE>
<CAPTION>
                                  Options Outstanding                 Options Exercisable
                       ------------------------------------------  -------------------------
                                        Weighted
                                        Average        Weighted                   Weighted
                                       Remaining        Average                    Average
     Range of            Number       Contractual      Exercise       Number      Exercise
  Exercise Prices      Outstanding       Life           Price      Exercisable      Price
--------------------   -----------   ------------     -----------  ------------  -----------
<S>                    <C>           <C>              <C>          <C>           <C>
 $   6.56 - $  8.94       57,764          2.4          $   7.77         57,764    $     7.77
 $  11.78 - $ 19.60    1,875,834          6.4             15.52      1,651,469         14.97
 $  20.57 - $ 27.82    1,620,320          8.2             23.14        576,738         22.42
 $  30.75 - $ 36.52    2,673,846          8.4             33.24        919,135         32.52
                       ---------        -----          --------      ---------    ----------
                       6,227,764          7.7          $  25.04      3,205,106    $    21.21
                       =========        =====          ========      =========    ==========
</TABLE>


                                       47
<PAGE>

      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 the Black-Scholes option-pricing model to determine the fair value of each
option grant and, accordingly, calculate the stock-based compensation expense.
The fair value and assumptions used are as follows:

<TABLE>
<CAPTION>
                                                       2002               2001               2000
                                                   --------------     --------------     --------------
<S>                                                <C>                <C>                 <C>
Fair value of stock options granted........           $15.36             $11.89              $15.33
Expected life of option (years)............             5.0                6.0                 6.0
Expected stock volatility..................            46.3%              47.0%               43.0%
Expected dividend yield....................              N/A                N/A                 N/A
Risk-free interest rate....................             3.2%               4.2%                5.4%
</TABLE>

13. 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,
which provides drilling and completion fluid systems and services,
solids-control and separation equipment and waste-management services; Smith
Bits, which designs, manufactures and sells three-cone drill bits, diamond drill
bits and turbines; 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, fittings and mill, safety and other maintenance products
to energy and industrial markets.

      The principal markets for these segments include all major oil and
gas-producing regions of the world including North America, Latin America,
Europe/Africa, the Middle East and the Far East. The Company's customers include
major multi-national, independent and national, or state-owned, oil companies.
In addition, the Company provides products and services to customers in the
petrochemical and chemical industries and other industrial markets.


                                       48
<PAGE>

      The following table presents financial information for each reportable
segment:

<TABLE>
<CAPTION>
                                          2002            2001            2000
                                      -----------     -----------     -----------
<S>                                   <C>             <C>             <C>
Revenues:
  Oilfield Products and Services .    $ 2,282,909     $ 2,424,131     $ 1,855,126
  Distribution ...................        887,171       1,127,078         905,888
                                      -----------     -----------     -----------
                                      $ 3,170,080     $ 3,551,209     $ 2,761,014
                                      ===========     ===========     ===========

Operating Income:
  Oilfield Products and Services .    $   266,692     $   354,614     $   188,017
  Distribution ...................         (4,026)         22,893          16,655
  General corporate ..............         (6,518)         (5,997)         (5,646)
                                      -----------     -----------     -----------
                                      $   256,148     $   371,510     $   199,026
                                      ===========     ===========     ===========

Capital Expenditures:
  Oilfield Products and Services .    $    91,056     $   118,350     $    85,225
  Distribution ...................          3,401           7,173           7,219
  General corporate ..............          2,594           2,119           2,137
                                      -----------     -----------     -----------
                                      $    97,051     $   127,642     $    94,581
                                      ===========     ===========     ===========

Depreciation and Amortization:
  Oilfield Products and Services .    $    81,924     $    84,311     $    72,379
  Distribution ...................          5,857           7,687           7,588
  General corporate ..............          1,546             897             721
                                      -----------     -----------     -----------
                                      $    89,327     $    92,895     $    80,688
                                      ===========     ===========     ===========

Total Assets:
  Oilfield Products and Services .    $ 2,284,109     $ 2,250,332     $ 1,829,908
  Distribution ...................        368,206         386,986         367,220
  General corporate ..............         97,230          98,510          98,159
                                      -----------     -----------     -----------
                                      $ 2,749,545     $ 2,735,828     $ 2,295,287
                                      ===========     ===========     ===========
</TABLE>

      The following table presents consolidated revenues by country:

<TABLE>
<CAPTION>
                                         2002          2001          2000
                                      ----------    ----------    ----------
<S>                                   <C>           <C>           <C>
United States ....................    $1,492,710    $1,829,378    $1,349,812
Canada ...........................       286,640       400,124       380,316
Norway ...........................       187,272       174,576       133,068
United Kingdom ...................       135,921       101,230        84,102
Venezuela ........................        64,452       109,791        92,294
Other ............................     1,003,085       936,110       721,422
                                      ----------    ----------    ----------
                                      $3,170,080    $3,551,209    $2,761,014
                                      ==========    ==========    ==========
</TABLE>


                                       49
<PAGE>

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

<TABLE>
<CAPTION>
                                        2002             2001             2000
                                      --------         --------         --------
<S>                                   <C>              <C>              <C>
United States ...............         $299,206         $287,630         $226,693
Canada ......................           27,854           29,012           33,974
Norway ......................           13,691           12,074           11,565
United Kingdom ..............           23,454           12,766           12,265
Venezuela ...................           12,543           14,926           16,336
Other .......................          142,472          132,089          108,215
                                      --------         --------         --------
                                      $519,220         $488,497         $409,048
                                      ========         ========         ========
</TABLE>

      The Company's revenues are derived principally from uncollateralized sales
to customers in the oil and gas industry, the petrochemical industry and other
industrial markets. This 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 this customer base is strong, and the Company has not
experienced significant credit losses on such receivables.

      The Company's expenditures for research and engineering activities are
attributable to the Company's Oilfield Products and Services segment and totaled
$50.6 million in 2002, $50.8 million in 2001 and $42.4 million in 2000.

14. 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 $61.3 million,
$51.4 million and $39.4 million in 2002, 2001 and 2000, respectively.

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

<TABLE>
<CAPTION>
                                                    AMOUNT
                                                  ---------
<C>                                               <C>
2003........................................      $  34,452
2004........................................         23,064
2005........................................         17,160
2006........................................         12,663
2007........................................          9,766
2008 through 2012...........................         15,643
Thereafter..................................         21,112
                                                  ---------
                                                  $ 133,860
                                                  =========
</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

      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 and performance bonds which totaled $72.4 million at December 31, 2002.
The amount primarily consists of a $25.0 million standby letter of credit,
supporting notes issued to certain CleanCut shareholders, and various
performance bonds, of which $33.1 million expire in 2003. Management does not
expect any material amounts to be drawn on these instruments.


                                       50
<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

      The Company is a defendant in various 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. Although the Company believes it is in
substantial compliance with environmental protection laws, estimating the
related liability is difficult considering the continual changes in
environmental regulations and the potential identification of new sites.

      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 operations, which are subject
to various indemnifications from former owners.

      As of December 31, 2002, the Company has established an environmental
reserve of $12.1 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, 2002, 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. In the event that i) the parties providing the environmental
indemnifications 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 establish additional environmental reserves of up
to $25.0 million, impacting earnings and cash flows in future periods.

15. SUBSEQUENT EVENT (UNAUDITED)

      Subsequent to December 31, 2002, M-I acquired certain oilfield chemical
assets of Dynea International in exchange for cash consideration of $78.6
million. The acquired operations reported revenues of approximately $75.0
million for the year ended December 31, 2002. The transaction was funded with
cash on hand and $37.2 million of borrowings under the Company's revolving
credit agreement.


                                       51
<PAGE>

16. QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                           FIRST         SECOND        THIRD         FOURTH         YEAR
                                         ----------    ----------    ----------    ----------    ----------
                                                       (In thousands, except per share data)
2002
<S>                                      <C>           <C>           <C>           <C>           <C>
Revenues ............................    $  827,377    $  801,038    $  777,232    $  764,433    $3,170,080
Gross profit ........................       241,502       236,255       217,725       222,820       918,302
Net income ..........................        28,730        26,922        19,790        17,747        93,189
Basic earnings per share ............          0.29          0.27          0.20          0.18          0.94
Diluted earnings per share ..........          0.29          0.27          0.20          0.18          0.93

2001
Revenues ............................    $  865,311    $  872,389    $  909,682    $  903,827    $3,551,209
Gross profit ........................       246,089       258,936       273,056       267,723     1,045,804
Net income ..........................        34,218        37,682        42,066        38,179       152,145
Basic earnings per share ............          0.34          0.38          0.42          0.39          1.53
Diluted earnings per share ..........          0.34          0.37          0.42          0.38          1.51
</TABLE>


                                       52
<PAGE>

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

      On April 18, 2002, the Company filed a Form 8-K reporting the dismissal of
the Company's independent public accountants, Arthur Andersen LLP, and the
engagement of Deloitte & Touche LLP as its new independent auditors.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      For information concerning directors of the Registrant, see the
information set forth following the caption "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 executive officers of the Registrant, see Item 4A 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 "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 "ELECTION OF DIRECTORS"
and "EXECUTIVE COMPENSATION" in the Company's Proxy Statement is incorporated
herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

      The Company maintains disclosure controls and procedures and internal
controls designed to ensure 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 within 90 days prior to the
filing of the Annual Report on Form 10-K and have determined that such
disclosure controls and procedures are effective.

      There were no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
evaluation date.


                                       53
<PAGE>

                                     PART IV

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

(a)  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                             PAGE
                                                                                           REFERENCE
                                                                                           ---------
<S>                                                                                        <C>
(1) Financial statements included in this report:
    Report of Independent Public Accountants .....................................             23
    Independent Auditor's Report .................................................             24
    Consolidated Balance Sheets at December 31, 2002 and 2001 ....................             25
    Consolidated Statements of Operations for the years ended
      December 31, 2002, 2001 and 2000 ...........................................             27
    Consolidated Statements of Cash Flows for the years ended
      December 31, 2002, 2001 and 2000 ...........................................             28
    Consolidated Statements of Stockholders' Equity and Comprehensive Income
      for the years ended December 31, 2002, 2001 and 2000 .......................             29
    Notes to Consolidated Financial Statements ...................................             30

(2) Financial Statement Schedule II-Valuation and Qualifying Accounts and Reserves             58
</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 and Index to Exhibits

<TABLE>
<S>               <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. Filed as Exhibit 3.1
                  to the Company's report on Form 8-K dated August 13, 1998 (and
                  filed on August 14, 1998) and incorporated herein by
                  reference.

        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.
</TABLE>

                                       54
<PAGE>

<TABLE>
<S>               <C>
        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.

        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.

        4.7   -   Form of Note dated October 15, 2001.

        9.    -   Not applicable.

       10.1   -   Smith International, Inc. 1989 Long Term Incentive
                  Compensation Plan, as amended to date.

       10.2   -   Smith International, Inc. Stock Plan for Outside Directors, as
                  amended to date.

       10.3   -   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.

       10.4   -   Supply Agreement dated April 2, 1987 between the Company and
                  TCM Holding Corporation and Rogers Tool Works, Inc. for the
                  supply of tungsten carbide products. Filed as Exhibit 10.6 to
                  the Company's report on Form 10-K for the year ended December
                  31, 1995 and incorporated herein by reference.

       10.5   -   Amendment to Supply Agreement dated January 22, 1993 between
                  the Company and Rogers Tool Works, Inc. Filed as Exhibit 10.7
                  to the Company's report on Form 10-K for the year ended
                  December 31, 1995 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.

       10.12  -   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.
</TABLE>


                                       55
<PAGE>

<TABLE>
<S>               <C>
       10.13  -   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.

       10.14  -   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.

       10.15  -   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.

       10.16  -   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.

       11.    -   Not applicable.

       12.    -   Not applicable.

       13.    -   Not applicable.

       18.    -   Not applicable.

       19.    -   Not applicable.

       21.1   -   Subsidiaries of the Company.

       23.1   -   Independent Auditors' Consent.

       23.2   -   Notice regarding Consent of Independent Public Accountants.

       99.1   -   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
                  filed herewith.

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

                                       56
<PAGE>

(b) REPORTS ON FORM 8-K.

The Registrant filed reports on Form 8-K during the quarterly period ended
December 31, 2002. All filings were reported under "Item 5. Other Events" and
disclosed the following:

      1.    Form 8-K dated October 1, 2002 which includes the Company's comments
            on third quarter 2002 outlook.

      2.    Form 8-K dated October 15, 2002 announcing the acquisition of
            CleanCut Technologies.

      3.    Form 8-K dated October 17, 2002 announcing the Company's results for
            the quarter ended September 30, 2002.


                                       57
<PAGE>

                                                                     SCHEDULE II

                            SMITH INTERNATIONAL, INC.

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 ADDITIONS           DEDUCTIONS
                                                         --------------------------  ------------
                                           BALANCE AT      CHARGED                                  BALANCE
                                            BEGINNING        TO                                     AT END
                                             OF YEAR       EXPENSE      OTHER(a)     WRITE-OFFS     OF YEAR
                                           ------------  ------------  ------------  -----------  ------------
<S>                                        <C>           <C>           <C>           <C>          <C>
Allowance for doubtful accounts:
     Year ended December 31, 2002          $    10,921   $     9,593   $        --    $  (8,176)  $    12,338
     Year ended December 31, 2001               10,211         2,986         1,029       (3,305)       10,921
     Year ended December 31, 2000                9,636         3,277           793       (3,495)       10,211
</TABLE>

(a)   Amounts represent accounts receivable reserves related to acquisitions
      made by the Company during the years presented.


                                       58
<PAGE>

 CERTIFICATION 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

I, Doug Rock, certify that:

1.    I have reviewed this annual report on Form 10-K of Smith International,
      Inc;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this annual
      report;

4.    The registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

      a.    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

      b.    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

      c.    presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on
      our most recent evaluation to the registrant's auditors and the audit
      committee of registrant's board of directors (or persons performing the
      equivalent function):

      a.    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b.    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officers and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.


Date: March 24, 2003                /s/ DOUG ROCK
     ----------------------------   ------------------------------------
                                    Doug Rock
                                    Chairman of the Board, Chief Executive
                                    Officer, President and Chief Operating
                                    Officer


                                       59
<PAGE>

 CERTIFICATION 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

I, Margaret K. Dorman, certify that:

1.    I have reviewed this annual report on Form 10-K of Smith International,
      Inc;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this annual
      report;

4.    The registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

      a.    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

      b.    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

      c.    presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on
      our most recent evaluation to the registrant's auditors and the audit
      committee of registrant's board of directors (or persons performing the
      equivalent function):

      a.    all significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b.    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officers and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.


Date: March 24, 2003                   /s/ Margaret K. Dorman
     ----------------------------      -----------------------------------------
                                       Margaret K. Dorman
                                       Senior Vice President,
                                       Chief Financial Officer and Treasurer


                                       60
<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.


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

March 24, 2003

      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 24, 2003
------------------------------------      Chief Executive Officer,
(Doug Rock)                               President and
                                          Chief Operating Officer

/s/ LOREN K. CARROLL                      Executive Vice President              March 24, 2003
------------------------------------      and Director
(Loren K. Carroll)

/s/ MARGARET K. DORMAN                    Senior Vice President,                March 24, 2003
------------------------------------      Chief Financial Officer
(Margaret K. Dorman)                      and Treasurer

/s/ BENJAMIN F. BAILAR                    Director                              March 24, 2003
------------------------------------
(Benjamin F. Bailar)

/s/ G. CLYDE BUCK                         Director                              March 24, 2003
------------------------------------
(G. Clyde Buck)

/s/ JAMES R. GIBBS                        Director                              March 24, 2003
------------------------------------
(James R. Gibbs)

/s/ JERRY W. NEELY                        Director                              March 24, 2003
------------------------------------
(Jerry W. Neely)

/s/ WALLACE S. WILSON                     Director                              March 24, 2003
------------------------------------
(Wallace S. Wilson)
</TABLE>


                                       61
<PAGE>

                                 EXHIBIT INDEX
<TABLE>
<S>               <C>

        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.

        4.7   -   Form of Note dated October 15, 2001.

       10.1   -   Smith International, Inc. 1989 Long Term Incentive
                  Compensation Plan, as amended to date.

       10.2   -   Smith International, Inc. Stock Plan for Outside Directors, as
                  amended to date.

       21.1   -   Subsidiaries of the Company.

       23.1   -   Independent Auditors' Consent.

       23.2   -   Notice regarding Consent of Independent Public Accountants.

       99.1   -   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
                  filed herewith.

       99.2   -   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
                  filed herewith.

</TABLE>