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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-K



(Mark One)

|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2002



OR



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



For the transition period from
 to



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VARCO
INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)



|Delaware (State or other jurisdiction of incorporation or organization) |  | 001-13309 (Commission File No.) |  | 76-0252850 (I.R.S. Identification
No.)
|----------------------------------------------------------------------- |  | ------------------------------- |  | --------------------------------------



|One BriarLake Plaza, 2000 W. Sam Houston Pkwy South, Suite 1700, Houston, TX (Address of principal executive offices) |  | 77042 (Zip Code)
|--------------------------------------------------------------------------------------------------------------------- |  | ----------------



Registrants telephone number, including area code: (281) 953-2200



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Securities registered pursuant to Section 12(b) of the Act:



|Title of each class                                          |  | Name of each exchange on which registered      
|------------------------------------------------------------ |  | -----------------------------------------------
|Common stock, $.01 par value Preferred Share Purchase Rights |  | New York Stock Exchange New York Stock Exchange



Securities registered pursuant to Section 12(g) of the Act:  None



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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 (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  x  No ̈



The aggregate market value of the voting stock held by non-affiliates of the registrant, as of the
registrants most recently completed second fiscal quarter, was $1,580,172,443 based on the closing sales price of such stock on such date.



The number of shares outstanding of the registrants common stock, as of March 7, 2003, was 97,115,592.



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DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants Proxy Statement for its 2003 Annual Meeting are incorporated by this reference into Part III, as set
forth herein.



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ITEM
1.    BUSINESS



General



Varco International, Inc.
(Varco or the Company) is a leading provider of highly engineered drilling and well-servicing equipment, products and services to the worlds oil and gas industry. With operations in over 350 locations in over 40
countries across six continents, the Company manufactures and supplies innovative drilling systems and rig instrumentation; oilfield tubular inspections and internal tubular coating; drill cuttings separation, management and disposal systems and
services; and coiled tubing and pressure control equipment for land and offshore drilling and well stimulation operations. The Company also provides in-service pipeline inspections, manufactures high pressure fiberglass and composite tubing, and
sells and rents advanced in-line inspection equipment to makers of oil country tubular goods. The Company has a long tradition of pioneering many drilling and production innovations which improve the efficiency, safety, cost and environmental impact
of petroleum operations.



The Company underwent a
significant transformation in May 2000 when Varco International, Inc., a California corporation (Varco), merged into Tuboscope Inc. (Tuboscope) (the Merger). The Merger was accounted for as a pooling of interests,
and unless otherwise indicated, the financial, historical and other information included herein is for the combined company. The Companys common stock is traded on the New York Stock Exchange under the symbol VRC. The Company
operates through four business groups: Drilling Equipment Sales, Tubular Services, Drilling Services, and Coiled Tubing & Wireline Products.



The Drilling Equipment Sales group manufactures and sells integrated systems and equipment for rotating and handling pipe on offshore and
land drilling rigs, including conventional drilling rig tools and equipment; pipe handling tools; hoisting equipment and rotary equipment; pressure control and motion compensation equipment; derricks and rig substructures; and flow devices.
Customers include onshore and offshore drilling contractors, major oil and gas companies, independent producers, national oil companies, and oilfield distributors.



The Tubular Services group provides internal coating products and services, inspection and quality assurance
services for oil country tubular goods (collectively, drillpipe, tubing, casing and flowlines). Additionally, this group includes the sale and rental of proprietary equipment used to inspect tubular products at steel mills, and the design,
manufacture and sale of corrosion-resistant high pressure fiberglass and composite tubular goods for both oilfield and industrial applications. The Tubular Services group also provides technical inspection services and quality assurance services for
in-service pipelines used to transport oil and gas. Customers include major oil and gas companies, independent producers, national oil companies, drilling contractors, oilfield supply stores, industrial plant operators and steel mills.



The Drilling Services group sells and rents technical
equipment used in, and provides services related to, the separation and management of drill cuttings (solids) from fluids used in the oil and gas drilling process (Solids Control). The Drilling Services group also sells and rents data
collection and monitoring systems used to manage the drilling process on site (Rig Instrumentation). Customers include major oil and gas companies, independent producers, national oil companies and drilling contractors.



The Coiled Tubing & Wireline Products group designs,
manufactures, and sells highly-engineered coiled tubing and related equipment, pressure control equipment, coiled tubing pipe, pressure pumping, wireline and other related equipment to companies engaged in providing oil and gas well drilling,
completion and remediation services. Customers include major oil and gas coiled tubing service companies, as well as major oil companies and independent producers.



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The following
table sets forth the contribution to the Companys total revenues of its four operating groups:



|                                  |  | Years Ended December 31,
|--------------------------------- |  | ------------------------
|                                  |  | 2002                    
|                                  |  | (in thousands)          
|Drilling Equipment Sales          |  | $                       
|Tubular Services                  |  |                         
|Drilling Services                 |  |                         
|Coiled Tubing & Wireline Products |  |                         
|                                  |  |                         
|Total                             |  | $                       
|                                  |  |                         



The
Companys principal executive offices are located at 2000 West Sam Houston Parkway South, Suite 1700, Houston, Texas 77042, its telephone number is (281) 953-2200, and its Internet web site address is http://www.varco.com. The
Companys annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, are available free of charge on its Internet website. These reports are posted on its website as soon as
reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission (SEC).



The Company has included a glossary of technical terms at the end of Item 1 of this Annual Report.



Influence of Oil and Gas Activity Levels on the Companys Business



The oil and gas industry in which the
Company participates has historically experienced significant volatility. Demand for the Companys services and products depends primarily upon the general level of activity in the oil and gas industry worldwide, including the number of
drilling rigs in operation, the number of oil and gas wells being drilled, the depth and drilling conditions of these wells, the volume of production, the number of well completions and the level of well remediation activity. Oil and gas activity is
heavily influenced by, among other factors, oil and gas prices worldwide. High levels of drilling and well-remediation activity generally spur demand for the Companys products and services used to drill and remediate oil and gas wells.
Additionally, high levels of oil and gas activity increase cash flows for drilling contractors, well-remediation oilfield service contractors, and manufacturers of oil country tubular goods to reinvest in capital equipment which the Company sells.



Approximately 52% of the Companys Drilling
Equipment Sales business groups revenues are determined by the capital expenditures of drilling contractors and oil companies on equipment for new drilling rig fabrication or drilling rig refurbishment projects. Capital expenditures are
influenced by cashflows these contractors generate from drilling activity, but also by the availability of financing, the outlook for future drilling activity, and other factors. Generally the Company believes the demand for more drilling capital
equipment lags increases in the level of drilling activity. Approximately 48% of the Drilling Equipment Sales revenue in 2002 was related to the sale of drilling equipment spare parts and consumables, the provision of equipment-repair services, and
the rental of drilling equipment, which the Company believes are generally determined directly by the level of drilling activity.



The majority of the Companys Tubular Service business group revenues are directly related to the level of demand for oil country
tubular goods, which is determined by the level of drilling and well remediation activity (which consume oil country tubular goods). A portion of Tubular Services sales are related to (1) demand for pipeline inspections, which are generally
unrelated to drilling or well remediation activity; (2) the sale of fiberglass and composite tubing to industrial customers, which is generally unrelated to drilling or well remediation activity; and (3) the sale of capital equipment inspection to
the manufacturers of oil country tubular goods, which is indirectly related to drilling activity, in the Companys view.



The Companys Drilling Services business group revenues are closely tied to drilling activity, although a portion of Drilling
Services revenues are related to the sale of capital drilling equipment to drilling contractors, which is indirectly related to the level of drilling activity.



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The
Companys Coiled Tubing & Wireline Products business group revenues are generally determined from the capital expenditures of well service contractors. These capital expenditures are influenced by the cash flows these contractors generate
from well remediation activity, but also by the availability of financing, the outlook for future well remediation activity, and other factors. A portion of the Coiled Tubing & Wireline Products revenues are determined by the demand for spare
parts and consumables, the provision of equipment repair services, and the rental of well remediation equipment, which the Company believes are generally determined directly by the level of well remediation activity.



Drilling and well remediation activity can fluctuate
significantly in a short period of time. The willingness of oil and gas operators to make capital investments to explore for and produce oil and natural gas will continue to be influenced by numerous factors over which the Company has no control,
including: the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to maintain oil price stability through voluntary production limits of oil; the level of oil production by non-OPEC countries; supply and
demand for oil and natural gas; general economic and political conditions; costs of exploration and production; and the availability of new leases and concessions and governmental regulations regarding, among other things, environmental protection,
taxation, price controls and product allocations. The willingness of drilling contractors and well remediation contractors to make capital expenditures for the type of specialized equipment the Company provides is also influenced by numerous factors
over which the Company has no control, including: the general level of oil and gas well drilling and well remediation; access to external financing; outlook for future increases in well drilling and well remediation activity; and government
regulations regarding, among other things, environmental protection, taxation, and price controls.



Low petroleum prices adversely affected the Companys business in the second half of 1998 and throughout 1999 as drilling and well
remediation activity declined. The Companys overall revenues grew in 1998, but declined steadily through 1999 and 2000 as the Company completed orders for Drilling Equipment Sales placed in 1997 and early 1998. Strengthening oil and gas prices
in late 1999 and 2000 led to recoveries in the Companys Tubular Services and Drilling Services groups as drilling and well remediation activity rose during the period. Drilling Equipment Sales and Coiled Tubing & Wireline Products revenues
began to rise in late 2000 as drilling contractors and well service companies began to invest in new capital equipment following the higher levels of oilfield activity in 2000. Drilling activity began to decline in mid-2001 due to lower oil and gas
prices, and remained low in 2002 despite improved oil and gas prices late in 2002. The Company believes that activity did not significantly improve in late 2002 due to uncertainty about the world economy amongst oil and gas companies. As a result,
the Companys Drilling Services and Tubular Services revenue began to decline in late 2001 and remained low in 2002 (although Tubular Services revenues increased slightly from 2001 due to the Companys acquisitions in this area). The
Companys Coiled Tubing & Wireline Products revenues increased slightly in 2002, mostly due to the effects of acquisitions the Company made in 2001, and Drilling Equipment Sales rose significantly in 2002 as the Company completed orders for
Drilling Equipment Sales placed in 2001.



Oil and Gas Well
Drilling and Remediation Processes



Oil and
gas wells are usually drilled by drilling contractors using a drilling rig. A bit is attached to the end of a drill stem, which is assembled by the drilling rig and its crew from 30-foot joints of drill pipe. Using the conventional rotary drilling
method, the drill stem is turned from the rotary table of the drilling rig by torque applied to the kelly, which is screwed into the top of the drill stem.



During drilling, heavy drilling fluids or drilling muds are pumped down the drill stem and forced out through jets in the bit.
The drilling mud returns to the surface through the hole area surrounding the drill stem, carrying with it the drill cuttings drilled out by the bit. The drill cuttings are removed from the mud by a solids control system (which can include shakers,
centrifuges and other specialized equipment) and disposed of in an environmentally sound manner. The solids control system permits the mud to be continuously reused and recirculated back into the hole. Through its Drilling Services business, the
Company sells and rents solids control



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equipment, and provides solids control services. Many operators coat the expensive drill stem to protect it from corrosive fluids sometimes
encountered during drilling, and inspect and assess the integrity of the drill pipe from time to time. Through its Tubular Services business, the Company provides drill pipe inspection and coating services.



As the hole depth increases, the kelly must be removed
frequently so that additional 30-foot joints of drill pipe can be added to the drill stem. When the bit becomes dull, the entire drill stem is pulled out of the hole and disassembled by disconnecting the joints of drill pipe. These are set aside or
racked, the old bit is replaced and the drill stem is reassembled and lowered back into the hole (a process called tripping). During drilling and tripping operations, joints of drill pipe must be screwed together and
tightened (made up), and loosened and unscrewed (spun out). The Companys Drilling Equipment Sales business provides drilling systems to manipulate and maneuver the drill pipe in this manner. When the hole has reached
certain depths, all of the drill pipe is pulled out of the hole and larger diameter pipe known as casing is lowered into the hole and permanently cemented in place in order to protect against collapse and contamination of the hole. The casing is
typically inspected before it is lowered into the hole, a service the Companys Tubular Services business provides. The Companys Coiled Tubing & Wireline Products Group manufactures pressure pumping equipment to cement casing in
place.



The raising and lowering of the drill
stem while drilling or tripping, and the lowering of casing into the wellbore, are accomplished with the rigs hoisting system. A conventional hoisting system is a block and tackle mechanism that works within the drilling rigs derrick.
The Companys Drilling Equipment Sales group sells and installs pipe hoisting systems.



During the course of normal drilling operations, the drill stem passes through different geological formations, which exhibit varying pressure characteristics. If not contained, oil, gas and/or water
would flow out of these formations to the surface. The two means of containing these pressures are (1) primarily the circulation of drilling muds while drilling and (2) secondarily the use of blowout preventers should the mud prove inadequate and in
an emergency situation.



Drilling muds are
carefully designed to exhibit certain qualities that optimize the drilling process. In addition to containing formation pressure, they must (i) cool the drill bit, (ii) carry drilled solids to the surface, and (iii) protect the drilled formations
from being damaged. Achieving these qualities often requires a formulation specific to a given well and can involve the use of expensive chemicals as well as natural materials. The fluid itself is often oil or expensive synthetics. Given this
expense, it is highly desirable to reuse as much of the drilling mud as possible. Solids control equipmentsuch as shale shakers, centrifuges and mud cleaners accomplish this objective. The Companys Drilling Services group rents, sells,
and services this equipment.



Drilling muds are
formulated based on expected drilling conditions. However, as the hole is drilled, the drill stem may encounter a high pressure zone where the mud is inadequate. Should efforts to weight up the mud in order to contain such a pressure
kick fail, a blowout could result, whereby fluids would flow uncontrolled into the well. To prevent blowouts to the surface of the well, a series of high-pressure valves known as blowout preventers (BOPs) are positioned at the top of the
well and, when activated, form tight seals that prevent the escape of fluids. When closed, conventional BOPs prevent normal rig operations and are activated only if drilling mud and normal well control procedures cannot safely contain the pressure.
BOPs have been designed to contain pressure of up to 15,000 psi. The Companys Drilling Equipment Sales business sells several types of BOPs.



The operations of the rig and the condition of the drilling mud are closely monitored by various sensors, which measure operating
parameters such as the weight on the rigs hook, kicks, the operation of the drilling mud pumps, etc. Through its Drilling Services business, the Company sells and rents drilling rig instrumentation packages that perform these measurements.



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After the well
has reached its total depth and the final section of casing has been set, the drilling rig is moved off of the well and the well is prepared to begin producing oil or gas in a process known as well completion. Well completion usually
involves installing production tubing concentrically in the casing. Due to the corrosive nature of many produced fluids, production tubing is often inspected and coated, which are services offered by the Companys Tubular Services business.
Sometimes operators choose to use corrosion resistant composite materials (which the Company offers through its Tubular Services business), or corrosion-resistant alloys.



From time to time, a producing well may undergo workover procedures to extend its life and increase its
production rate. Workover rigs are used to disassemble the wellhead, tubing and other completion components of an existing well, in order to stimulate or remediate the well. Workover rigs are similar to drilling rigs in their capabilities to handle
tubing, but are usually smaller and somewhat less sophisticated. Tubing removed from a well during a well remediation operation is often inspected to determine its suitability to be reused in the well, which is a service the Companys Tubular
Services business provides.



Frequently coiled
tubing units or wireline units are used to accomplish certain well remediation operations or well completions. Coiled tubing is a recent advancement in petroleum technology consisting of a continuous length of reeled tubing which can be injected
concentrically into the production tubing all the way to the bottom of most wells. It permits many operations to be performed without disassembling the production tubing, and without curtailing the production of the well. Wireline winch units are
devices that utilize single-strand or multistrand wires to perform well-remediation operations, such as lowering tools and transmitting data to the surface. Through its Coiled Tubing & Wireline Products business, the Company sells and rents
various types of coiled tubing equipment, coiled tubing pipe, wireline equipment and tools.



Drilling Equipment Sales Group



The Company has a long tradition of pioneering innovations in drilling systems which improve the efficiency, safety, and cost of drilling operations. The Drilling Equipment Sales group designs,
manufactures and sells a wide variety of top drives, automated pipe racking systems, motion compensation systems, rig controls, BOPs, handling tools, drawworks, risers, rotary tables, and other drilling equipment for both the onshore and offshore
markets. Recently the Company successfully expanded its business in the land rig market. The Drilling Equipment Sales group sells directly to drilling contractors, rig fabricators, national oil companies and major and independent oil and gas
companies. Demand for its products, several of which are described below, is strongly dependent upon capital spending plans by oil and gas companies and drilling contractors, and the level of oil and gas well drilling activity.



Top Drives.    The Top Drive
Drilling System (TDS), originally introduced by Varco in 1982, significantly alters the traditional drilling process. The TDS rotates the drill stem from its top, rather than by the rotary table, with a large electric motor affixed to
rails installed in the derrick that traverses the length of the derrick to the rig floor. Therefore, the TDS eliminates the use of the conventional rotary table for drilling. Components of the TDS also are used to connect additional joints of drill
pipe to the drill stem during drilling operations.



The TDS combines elements of pipe handling tools, as well as hoisting and rotary equipment, into a single system. During drilling operations, the TDS performs functions such as making-up joints of drill pipe, maneuvering joints of
drill pipe into position to be added to the drill stem when drilling, and holding and hoisting the entire drill stem. Drilling with a TDS provides several advantages over conventional drilling. It enables drilling with three joints of drill pipe,
often reducing by two-thirds the time spent in making connections of drill pipe. In addition, it facilitates horizontal and extended reach drilling (the practice of drilling wells which deviate substantially from vertical) by
providing the ability to rotate the pipe as it is removed from, or placed into, the hole, thus reducing the incidence of pipe sticking. By facilitating extended reach drilling, the TDS increases the area which can be drilled from a given location,
such as a fixed platform. Thus, the production from a given reservoir of oil can be increased, and the number of costly fixed platforms required to develop the field can be minimized.



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Pipe
Racking Systems.    Pipe racking systems are used to handle drill pipe, casing and tubing on a drilling rig. Vertical pipe racking systems move drill pipe and casing between the well and a storage (racking) area
on the rig floor. Horizontal racking systems are used to handle tubulars while stored horizontally (for example, on the pipe deck of an offshore rig) and transport tubulars up to the rig floor and into a vertical position for use in the drilling
process.



Mechanical vertical pipe racking
systems greatly reduce the manual effort involved in pipe handling. The Pipe Handling Machine (PHM), introduced by Varco in 1985, provides a fully automated mechanism for handling and racking of drill pipe during drilling and tripping
operations, spinning and torquing drill pipe, and automatic hoisting and racking of disconnected joints of drill pipe. These functions are integrated via computer controlled sequencing, and operated by a driller in an environmentally secure cabin.
The Automated Roughneck is an automated microprocessor-controlled version of the Iron Roughneck, which was originally introduced by Varco in 1976. An Iron Roughneck is an automated device that makes pipe connections on the rig floor and requires
less direct involvement of rig floor personnel in potentially dangerous operations.



Vertical pipe racking systems are used predominantly on offshore rigs and are found on almost all floating rigs. Horizontal pipe racking systems were introduced by Varco in 1993. They include the Pipe
Deck Machine (PDM), which is used to manipulate and move tubulars while stored in a horizontal position; the Pipe Transfer Conveyor (PTC), which transports sections of pipe to the rig floor; and a Pickup Laydown System
(PLS), which raises the pipe to a vertical position for transfer to a vertical racking system. These components may be employed separately, or incorporated together to form a complete horizontal racking system, known as the Pipe Transfer
System (PTS).



Hoisting systems are
used to raise or lower the drill stem while drilling or tripping, and to lower casing into the wellbore. During 1999, Varco introduced its first Automated Hoisting System (AHS), which uses an AC-powered motor and a braking
system that offers very precise control. The AHS automates the repetitive hoisting and drilling operations through the user-friendly, touch-screen Electronic Driller interface. The AHS is smaller and lighter than conventional hoisting systems. The
Company received its first order for an AHS in 2000 and delivered the first AHS in 2001.



Blow-out Preventers.    BOPs are devices used to seal the space (annulus) between the drill pipe and the borehole to prevent blow-outs (uncontrolled flows of
formation fluids and gases to the surface). The Drilling Equipment Sales group manufactures BOPs under the Shaffer brand name. Ram and annular BOPs are back-up devices and are activated only if other techniques for controlling pressure in the
wellbore are inadequate. When closed, these devices prevent normal rig operations. Ram BOPs seal the wellbore by hydraulically closing rams (thick heavy blocks of steel) against each other across the wellbore. Specially designed packers seal around
specific sizes of pipe in the wellbore, shear pipe in the wellbore or close off an open hole. Annular BOPs seal the wellbore by hydraulically closing a rubber packing unit around the drill pipe or kelly or by sealing against itself if nothing is in
the hole. Varcos Pressure Control While Drilling (PCWD) BOP, introduced in 1995, allows operators to drill at pressures up to 2,000 psi without interrupting normal operations, and can act as a normal spherical BOP at pressures up
to 5,000 psi.



In 1998 Varco introduced the
NXT®ram type BOP which eliminates door bolts, providing significant weight and space savings. Its unique features make subsea operation more efficient through faster ram configuration changes without tripping the BOP stack.



The Company sells conventional BOP control
systems under the registered trademark Shaffer®. This control system is hydraulically activated and is used to
operate BOPs and associated valves remotely for both land systems and offshore systems. With the recent increase in deep-water drilling depths, traditional hydraulic control systems are inadequate to activate BOPs, which rest on the ocean floor and
may be 5,000 feet or more below the surface. In 1997, Varco introduced the IVth Subsea Generation MUX, an electronic control system designed specifically for deep-water applications. In 2001, the Company acquired technology from Maris International
related to a continuous circulation device the Company hopes to commercialize.



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Motion
Compensation Systems.    The Drilling Equipment Sales group sells motion compensation equipment under the registered trademark Shaffer®. Motion compensation equipment stabilizes the bit on the bottom of the hole, increasing drilling effectiveness of floating offshore rigs by compensating for wave and wind action. Tensioners provide
continuous axial tension to the marine riser pipe (larger diameter pipe which connects floating drilling rigs to the well on the ocean floor) and guide lines on floating drilling rigs, tension leg platforms and jack-up drilling rigs. In 1996 Varco
introduced the Riser Recoil System, which provides a safe disconnect when the floating rig encounters an unanticipated need to leave location.



Pipe Handling Tools.    The Companys pipe handling tools are designed to enhance the safety, efficiency
and reliability of pipe handling operations. Many of these tools have provided innovative methods of performing the designated task through mechanization of functions previously performed manually. The Drilling Equipment Sales group manufactures
various tools used to grip, hold, raise, and lower pipe, and in the making up and breaking out of drill pipe, workstrings, casing and production tubulars including spinning wrenches, manual tongs, torque wrenches and kelly spinners.



The Drilling Equipment Sales group also manufactures other
tools used in various pipe handling functions. Slips are gripping devices which hold pipe or casing in suspension while in the hole. Other products, which include safety clamps, casing bushings and casing bowls, are used to hold and guide drill pipe
or casing while in the hole, prevent tool strings from being dropped down the well accidentally, and ensure that the casing is centered in the hole.



Rotary Equipment.    Rotary equipment products consist of kelly bushings and master bushings. The kelly bushing
applies torque to the kelly to rotate the drill stem and fits in the master bushing which is turned by the rotary table on the floor of the rig. The Drilling Equipment Sales group produces kelly bushings and master bushings for most sizes of kellys
and makes of rotary tables. In 1998, Varco introduced the Rotary Support Table for use on rigs with Top Drive Drilling Systems. The Rotary Support Table is used in concert with the TDS to completely eliminate the need for the larger conventional
rotary table.



Derricks and
substructures.    The Company began offering design, fabrication and repair services for derricks and substructures through its acquisition of Morinoak International Ltd. in September 2001. Through Morinoak International, the
Company operates engineering and fabrication facilities in Great Yarmouth, England and Aberdeen, Scotland. Morinoaks service offerings include modification of existing drilling rigs to accept top drives and pipe handling equipment. It also
refurbishes, repairs and fabricates structural components from both land and offshore rigs.



Service & Spares.    Approximately 48% percent of the sales of the Drilling Equipment Sales group consist of spare and replacement parts, consumables, provision of
drilling equipment repair services, and rental of drilling systems. The Company conducts Drilling Equipment Sales manufacturing operations at major facilities in Orange, California; Houston, Texas; Mexicali, Mexico; Great Yarmouth, England; and
Etten-Leur, Netherlands. The Drilling Equipment Sales group maintains sales and service offices in most major oilfield markets, either directly or through agents. The Company expanded its market presence in Norway when it acquired its agent, Scana
IOS Desco AS, in December 2000, and expanded its drilling equipment repair business through a small acquisition made in early 2003.



The products of the Drilling Equipment Sales group are sold in highly competitive markets and its sales and earnings can be affected by
competitive actions such as price changes, new product development or improved availability and delivery. The groups primary competitors are National-Oilwell, Inc.; Cooper Cameron Corporation; Hydril Company; Aker Kvaerner AS; Tesco
Corporation; Canrig (a division of Nabors Industries); Wirth M&B GmbH; DenCon Oil Tools; Cavins Oil Tools; Cooper Rig; Heartland Rig International; Soilmec (a division of the Trevi Group); Access Oil Tools; and Weatherford International, Inc.
Management believes that the principal competitive factors affecting its Drilling Equipment Sales business are performance, quality, reputation, customer service, product availability, availability of spare parts and consumables, breadth of product
line and price.



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Tubular Services Group



The Companys Tubular Services Group
provides a variety of tubular services to oil and gas producers, drilling contractors, well-remediation contractors, pipeline operators, and tubular manufacturers and distributors. The Tubular Services group provides inspection and reclamation
services for drillpipe, casing, production tubing, sucker rods and line pipe at drilling and workover rig locations, at yards owned by its customers, at steel mills and processing facilities manufacturing tubular goods, and at which it owns. The
Tubular Services group also provides for the internal coating of tubular goods at 15 coating plants worldwide, including a plant opened in Navasota, Texas in 1998, and a coating plant opened in the Far East in early 2002. The Company also conducts
tubular coating operations through licensees in certain locations. Additionally, the Company designs, manufactures and sells high pressure fiberglass and composite tubulars for use in corrosive applications, and provides in-place inspection of oil,
gas and product transmission pipelines through its application of instrumented survey tools (smart pigs) which it engineers, manufactures and operates.



The Companys Tubular Services business was increased significantly through its acquisition of
substantially all of the assets of the oilfield services business of ICO, Inc., including the stock of its Canadian operating subsidiary, on September 6, 2002. Revenues for the business acquired were approximately $116 million in the trailing twelve
months ended June 30, 2002. The ICO oilfield services business provides tubular inspection, coating and reclamation; sucker rod inspection and reclamation; tubular transport and logistics management; and beam pump engine repair. Operations are
primarily conducted in North America.



The
Companys customers rely on tubular inspection services to avoid failure of tubing, casing, flowlines, pipelines and drillpipe. Such tubular failures are expensive and in some cases catastrophic. The Companys customers rely on internal
coatings of tubular goods to prolong the useful lives of tubulars and to increase the volumetric throughput of in-service tubular goods. The Companys customers sometimes use fiberglass or composite tubulars in lieu of conventional steel
tubulars, due to the corrosion-resistant properties of fiberglass and other composite materials. Tubular inspection and coating services, are used most frequently in operations in high-temperature, deep, corrosive oil and gas environments. In
selecting a provider of tubular inspection and tubular coating services, oil and gas operators consider such factors as reputation, experience, technology of products offered, reliability and price.



Tubular Coating.    The Company
develops, manufactures and applies its proprietary tubular coatings, known as Tube-Kote®coatings, to new and
used tubulars. Tubular coatings help prevent corrosion of tubulars by providing a tough plastic shield to isolate steel from corrosive oilfield fluids such as CO2, H2S and brine. Delaying or preventing corrosion extends the life of existing
tubulars, reduces the frequency of well remediation and reduces expensive interruptions in production for oil and gas producers. In addition, coatings are designed to increase the fluid flow rate through tubulars by decreasing or eliminating
paraffin and scale build-up, which can reduce or block oil flow in producing wells. The smooth inner surfaces of coated tubulars often increase the fluid through-put on certain high-rate oil and gas wells by reducing friction.



The Company has a history of introducing new coating products
that are custom-engineered to address increasingly corrosive environments encountered in oil and gas drilling and production operations. In 1998, the Company introduced TK®Liner, a fiberglass liner product which offers the strength of steel tubing and the corrosion resistance of fiberglass, and which supplements its
traditional plastic coating lines. The Companys reputation for supplying quality internal coatings is an important factor in its business, since the failure of coatings can lead to expensive production delays and premature tubular failure.



Fiberglass & Composite
Tubulars.    When compared to conventional carbon steel and even corrosion-resistant alloys, resin-impregnated fiberglass and other modern plastic composites often exhibit superior resistance to corrosion. Some producers
manage the corrosive fluids sometimes found in oil and gas fields by utilizing composite or fiberglass tubing, casing and line pipe in the operations of their fields. In 1997, the Company acquired Fiber Glass Systems, a leading provider of high
pressure fiberglass tubulars used in oilfield



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applications, to further serve the tubular corrosion prevention needs of its customers. Fiber Glass Systems has manufactured fiberglass pipe
since 1968 under the name Star®, and was the first manufacturer of high-pressure fiberglass pipe to
be licensed by the API in 1992. The Company acquired two fiberglass and composite tubing manufacturing facilities in the U.S. and one in China from A.O. Smith in December 2000, and acquired another U.S. fiberglass tubing manufacturing facility from
Fibercast in July 2001, which significantly expanded its manufacturing capabilities and product lines. These acquisitions extended the Companys fiberglass and composite tubing offering into industrial applications, in addition to its oilfield
market.



Tubular
Inspection.    Newly manufactured pipe sometimes contains serious defects that are not detected at the mill. In addition, pipe can be damaged in transit and during handling prior to use at the well site. As a result,
exploration and production companies often have new tubulars inspected before they are placed in service to reduce the risk of tubular failures during drilling, completion, or production of oil and gas wells. Used tubulars are inspected by the
Company to detect service-induced flaws after the tubulars are removed from operation. Used drill pipe and used tubing inspection programs allow operators to replace defective lengths, thereby prolonging the life of the remaining pipe and saving the
customer the cost of unnecessary tubular replacements and expenses related to tubular failures.



The Tubular Services groups tubular inspection services employ all major non-destructive inspection techniques, including electromagnetic, ultrasonic, magnetic flux leakage and gamma ray. These
inspection services are provided both by mobile units which work at the wellhead as used tubing is removed from a well, and at fixed site tubular inspection locations. The group provides an ultrasonic inspection service for detecting potential
fatigue cracks in the end area of used drill pipe, the portion of the pipe that traditionally has been the most difficult to inspect. Tubular inspection facilities also offer a wide range of related services, such as API thread inspection, ring and
plug gauging, and a complete line of reclamation services necessary to return tubulars to useful service, including tubular cleaning and straightening, hydrostatic testing and re-threading.



In 1998, the Company acquired three tubular services
businesses to enhance its competitive positions in Norway, Egypt, and the west coast of the United States. Additionally, these acquisitions provided opportunities to achieve consolidation cost savings. In 1999, the Company completed acquisitions of
Geo-Ray Oilfield Inspections Ltd. in Canada, and the tubular services business of AGR Services AS in Floro, Norway. In 2001, it acquired the assets of Servizi Ispettivi, a small tubular services business in Italy, and in 2002, it acquired the assets
of A&A Tubular Inspection in California, and substantially all of the oilfield services business of ICO, Inc. In early 2003 it acquired the tubular services assets of Petroleum Tubular Inspection in South America.



In addition to its new and used tubular inspection and
reclamation services, the Company also offers a comprehensive proprietary tubular inventory management system (TDSTM) which permits the real-time tracking of customers tubular inventories within the Companys facilities. The system permits customers to remotely access and monitor tubular inspection and coating progress.



The Company has pioneered many tubular inspection technologies
used in the oilfield, and continues to expand its product offering. In 1996, the Company installed its first proprietary high-speed full-body ultrasonic tubular inspection unit (Truscope®). The new service provides 100% ultrasonic coverage of tubulars at a rate of up to 200 feet per minute. In 1997, the Company began offering a
proprietary, patented external tubular connection integrity test, the ISO-Gator,TMfor use at the rig site. The
technology was obtained through the Companys acquisition of the operating assets of Gator Hawk, Inc. In 1998, the Company introduced a new coiled tubing inspection service with its electromagnetic CT Scope®.



Mill Systems and Sales.    The Company engineers and fabricates inspection equipment for steel mills, which it
sells and rents. The equipment is used for quality control purposes to detect defects in the pipe during the high-speed manufacturing process. Each piece of mill inspection equipment is designed to customer specifications and is installed and
serviced by the Company. Since 1962, the Company has installed more than 80 units worldwide, in most major steel mills. Equipment is manufactured at the Companys Houston, Texas and



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Celle, Germany facilities. Revenue for Mill Systems and Sales fluctuates significantly from year to year due to the timing of negotiating
large domestic and export sales contracts, arranging financing and manufacturing equipment.



Sucker Rod Inspection & Reclammation.    The 2002 acquisition of the oilfield services business of ICO, Inc. provided the Tubular Services group a significant sucker rod
services businesses. The Tubular Services group cleans, straightens, inspects and coats sucker rods at eleven facilities throughout the Western Hemisphere. Additionally, new sucker rods are inspected before they are placed into service, to avoid
premature failure, which can cause the oil well operator to have to pull and replace the sucker rod.



Pipeline Inspection.    In-place inspection services for oil and gas pipelines identify anomalies in the
pipelines without removing or dismantling the pipelines or stopping the product flow, giving customers a convenient and cost-effective method of identifying potential defects in pipelines. The Tubular Services group inspects pipelines by launching a
sophisticated survey instrument into the pipeline. Propelled by the product flow, the instrument uses electromagnetics, ultrasonics, and mechanical measurements received on digital and analog media to monitor the severity and location of internal
and external pitting-type corrosion as well as other mechanical anomalies in the pipeline, providing a basis for evaluation and repair by the customer. Once the test is complete, the survey instrument is returned to the Company, refurbished and used
for future pipeline inspections.



Management
believes the major competitive factors for Pipeline Services are reputation for quality, service, reliability of obtaining a successful survey on the first run, product technology, price, and technical support on survey interpretation. Demand for
the Companys pipeline services is somewhat dependent on commodity prices, which affect funds available for discretionary pipeline inspection and maintenance expenditures by many pipeline operators. This dependence is most pronounced in
international markets. Additionally, significant consolidation in the pipeline industry has caused many pipeline operators to defer inspections in recent years as they re-evaluate their pipeline maintenance programs following mergers and
acquisitions. Management believes there are growth opportunities for the Companys Pipeline Services due to the aging of the worldwide pipeline network, and construction of new pipelines. U.S. regulatory inspection requirements and an extensive
pipeline infrastructure in Eastern Europe are additional industry factors expected to contribute to the growth of the Companys Pipeline Services, in the Companys view. Catastrophic pipeline failures in the U.S. in recent years have
prompted regulators to require more stringent pipeline inspection, which may increase the demand for pipeline inspection services. Additionally, management believes that the Companys new digital TruRes®inspection technology and other new software and survey products will provide growth opportunities. The TruRes®technology applies advanced digital computer technology and other advancements within the body of the inspection tool to provide greater measurement
sampling density and pipe-body coverage. In 2001, the Company acquired certain assets of Geodz, Inc., a software engineering firm, to enhance its pipeline position survey software, and in 2002 it acquired the assets of Marr Associates Pipeline
Integrity, Ltd, a Canadian provider of data management and direct pipeline assessment services. Additionally, in 2002 the Company acquired approximately 24 percent of NDT Systems & Services, AG, a German firm developing a new ultrasonic pipeline
inspection tool. As part of the investment the Company obtained certain exclusive rights to market the ultrasonic pipeline inspection service.



The Tubular Services groups customers include major and independent oil and gas companies, national oil companies, drilling and
workover contractors, oilfield equipment and product distributors and manufacturers, oilfield service companies, pipeline operators, steel mills, and other industrial companies. The Companys competitors in Tubular Services include, among
others, Ameron International Corp, EDO Corporation, Pipeline Integrity International Ltd. (a division of General Electric), ShawCor Ltd., Smith International, Inc., Franks International, Inc., H. Rosen Engineerng, GmbH; T.D. Williamson, Inc.;
and Patterson Tubular Services. In addition, the Tubular Services group competes with a number of smaller regional competitors in tubular inspection. Certain foreign jurisdictions and government-owned petroleum companies located in some of the
countries in which this group operates have adopted policies or regulations which may give local nationals in



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these countries certain competitive advantages. Within the Companys corrosion control products, certain substitutes such as
non-metallic tubulars, inhibitors, corrosion resistant alloys, cathodic protection systems, and non-metallic liner systems also compete with the Companys products. Management believes that the principal competitive factors affecting its
Tubular Services business are performance, quality, reputation, customer service, product availability, availability of spare parts and consumables, breadth of product line and price.



Drilling Services Group



The Companys Drilling Services group is engaged in the provision of highly-engineered equipment, products and services which
separate and manage drill cuttings produced by the drilling process (Solids Control Services). Drill cuttings are usually contaminated with petroleum or drilling fluids, and must be disposed of in an environmentally sound manner.
Additionally, efficient separation of drill cuttings enhances the drilling effectiveness of the drilling fluids for re-use. The Drilling Services group also rents and sells proprietary drilling rig instrumentation packages which monitor various
processes throughout the drilling operation, under the name MD/Totco. The groups rig instrumentation packages collect and analyze data through both analog and digital media, enabling rig personnel to maintain safe and efficient drilling
operations.



Solids
Control.    The Drilling Services group uses a variety of technologies to separate drill cuttings from drilling fluids, and to further transport, dry and refine drill cuttings for safe disposal. The Company believes the
regulatory and industry trends toward minimizing the environmental impact of drilling operations in a number of environmentally sensitive oil and gas producing regions will lead to greater demand for solids control products and closed loop drilling
systems. A closed loop drilling system is a solids control system in which the drilling mud is reconditioned and recycled throughout the drilling process on the rig itself. The Company further believes the trend towards more technically complex
drilling, including highly deviated directional wells and slim-hole completions, will favorably impact the demand for solid controls technology because of its ability to reduce costly downhole problems. As environmental constraints are increased and
as awareness of environmental protection grows, the Company believes that its drill cuttings separation and treating processes will experience increased demand.



The Company has a history of introducing new solids control products and services obtained both through its
internal development and through acquiring or licensing technologies from others. The Company acquired the Gumbo Chain from Nu-Tec, Inc. in 1997, a product to remove sticky shale or gumbo, which is encountered in certain geologic
environments, from drilling fluid. In 1998, the Company initiated operations with a proprietary unit which removes hydrocarbons from drill cuttings using heat, a process called Thermal Desorption. The processed cuttings are usually
rendered inert and can be disposed of with minimal environmental impact. The Company commenced operation of additional cuttings thermal desorption units in South America and the Middle East. A shale shaker is the primary device on an oil rig for
removing drill solids from drilling mud. The Companys VSM 300, introduced in 1996, was the first shale shaker which offered a balanced elliptical vibratory motion, which improves cuttings conveyance and reduces oil on cuttings. The Company
also introduced its new Cobra®shale shaker in 1998. The Cobra®has a small footprint and a lightweight design, and is priced to compete in the more price-sensitive segment of the market. The Company began
offering the King Cobra shale shaker in 1999. The King Cobra is approximately one third larger than the Cobra Shaker, and also targets both the offshore and land markets.



The Company acquired M.S.D. Inc. in 1998 in order to enhance its cuttings slurrification and injection
capabilities. In 1999, the Company acquired Manufacturas Rowi, C.A. (Rowica), a Venezuelan solids control company, and the solids control assets of Newpark Resources, Inc. (Newpark). In early 2001, the Company acquired certain assets of
Angelle Construction, Inc. to enhance its cuttings transport business, and in 2002 it acquired the assets of Environmental Rig Solutions, L.P., a Texas-based provider of waste management equipment for drilling operations. In early 2003 the Company
made an equity investment in a small start-up company engaged in the development of new solids control technology. As part of the investment, the Company obtained exclusive marketing rights to new solids control technology for oilfield applications,
obtained warrants



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to purchase additional equity, and agreed to invest additional equity if the company achieves certain technical milestones.



The Drilling Services group manufactures conventional and
linear motion shale shakers and shale shaker screens, high speed and conventional centrifuges, desanders (which remove large drill solids from drilling mud), desilters (which remove small drill solids from drilling mud), degassers (which remove air
and gasses from drilling mud) and closed loop drilling fluids systems at its facilities in Conroe, Texas; Houston, Texas; Aberdeen, Scotland; Leduc, Alberta; and Trinidad. The group markets solids control equipment under the Brandt®brand name. For the year ended December 31, 2002, approximately 38% of the Drilling Services groups solids
control equipment revenue was generated from the sale of solids control equipment and inventory, and approximately 62% of such revenue was generated from rentals and services.



Drilling Rig Instrumentation.    The Drilling Services groups rig
instrumentation systems provide drilling rig operators real time measurement and monitoring of critical parameters required to improve rig safety and efficiency. Systems are both sold and rented, and are typically comprised of several sensors placed
throughout the rig to measure parameters such as weight on bit, hookload, standpipe pressures, mud pump strokes, drilling mud levels, torque, and others, all networked back to a central command station for review, recording and interpretation.
Additionally, the rig instrumentation packages typically provide multiple CRT screens around the rig for various rig personnel to perform individual jobs more effectively, and cameras for certain areas to permit remote monitoring. The Company offers
proprietary touch-screen displays, interpretive software, and data archival and retrieval capabilities. In 1999, the Company introduced its RigSenseproduct, which combines leading hardware and software technologies into an integrated drilling rig package. This product permits access of drilling data from offsite locations, enabling company
personnel to monitor drilling operations from an office environment, through a secure link. In 2001, the Company completed the acquisitions of Chimo Equipment Ltd. in Canada; Alberta Instruments Ltd. in Canada; Adair Supply & Rentals, Inc. in
Corpus Christi, TX; and Wagner Instrumentation Inc. in Houston, TX; which were all engaged in drilling rig instrumentation business.



Drilling consoles, and recently, the Companys V-ICIS, are typically sold as an integral part of a new rig, or as a major upgrade component for an existing rig. In the United States and Canada, most
other drilling instrumentation products are usually rented to the drilling contractor or oil company when necessary, and are therefore not permanently installed on the rig. Internationally, nearly all instrumentation equipment is sold to the rig
owner and becomes a permanent part of the drilling rig.



The groups customers for Drilling Services include major and independent oil and gas companies, national oil companies, and drilling contractors. Competitors in Drilling Services include Smith International (SWACO);
Derrick Manufacturing Corp.; Oil Tools Pte. Ltd; Peak Energy Services, Ltd.; National Oilwell Inc.; Petron Industries, Inc.; Epoch (a division of Nabors Industries); Pason Systems, Inc.; Kem-tron, Inc.; Double Life Corporation, Inc. and a number of
regional competitors. The Companys Drilling Services group operates in highly competitive markets. Management believes that on-site service is becoming an increasingly important competitive element in the Drilling Services market. Management
believes that, in addition to on-site services, the principal competitive factors affecting its Drilling Services business are performance, quality, reputation, customer service, product availability, breadth of product line and price.



Coiled Tubing & Wireline Products Group



The Companys Coiled Tubing & Wireline Products
group sells and rents capital equipment, and sells spare parts, repair services and consumables to oilfield service providers, who use the Companys products to remediate, workover and, to a lesser extent, drill oil and gas wells. The Company,
through its January 2001 acquisition of Quality Tubing, Inc., also manufactures steel coiled tubing used by well remediation contractors and oil and gas producers. Demand for the groups Coiled Tubing & Wireline Products is strongly
dependent upon the capital spending plans of coiled tubing and wireline service companies, and the general level of well remediation activity.



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Coiled
Tubing Products.    Coiled tubing consists of flexible steel tubing manufactured in a continuous string and spooled on a reel. It can extend several thousand feet in length and is run in and out of the wellbore at a high rate
of speed by a hydraulically operated coiled tubing unit. A coiled tubing unit is typically mounted on a truck or skid (steel frames on which portable equipment is mounted to facilitate handling with cranes or flatbed trucks) and consists of a
hydraulically operated tubing reel or drum, an injector head which pushes or pulls the tubing in or out of the wellbore, and various power and control systems. Coiled tubing is typically used with sophisticated pressure control equipment which
permits the operator to continue to safely produce the well. The Coiled Tubing & Wireline Products group manufactures and sells both coiled tubing units and the ancillary pressure control equipment used in these operations.



Coiled tubing provides a number of significant functional
advantages over the principal alternatives of conventional drill pipe and workover pipe. Coiled tubing allows faster tripping, since the coiled tubing can be reeled very quickly on and off a drum and in and out of a wellbore. In
addition, the small size of the coiled tubing unit compared to an average workover rig or drilling rig reduces preparation time at the well site. Coiled tubing permits a variety of workover and other operations to be performed without having to pull
the existing production tubing from the well and allows ease of operation in horizontal or highly deviated wells. Thus, operations using coiled tubing can be performed much more quickly and, in many instances, at a significantly lower cost. Finally,
use of coiled tubing generally allows continuous production of the well, eliminating the need to temporarily stop the flow of hydrocarbons. As a result, the economics of a workover are improved because the well can continue to produce hydrocarbons
and thus produce revenues while the well treatments are occurring. Continuous production also reduces the risk of formation damage which can occur when the flow of fluids is stopped or isolated.



Currently, most coiled tubing units are used in well
remediation and completion applications. The Company believes that advances in the manufacturing process of coiled tubing, tubing fatigue protection and the capability to manufacture larger diameter and increased wall thickness coiled tubing strings
have resulted in increased uses and applications for coiled tubing products. For example, some well operators are now using coiled tubing in drilling applications such as slim hole reentries of existing wells. The Company engineered and manufactured
the first coiled tubing units built specifically for coiled tubing drilling in 1996.



There are certain limitations to the use of coiled tubing. Coiled tubing generally is made of high strength, alloy steel which wears down or fatigues over time as a result of internal pressure, acidic
operating environments and normal bending cycles. Thus, operators must carefully monitor the use of the tubing. In addition, coiled tubing will buckle if the weight of the coiled tubing being conveyed in the well becomes too great or if the tube
becomes inhibited by some obstacle or irregularity in the wellbore. Buckling has not proven to be a significant obstacle in most well remediation applications, and the Company believes it will become less of an issue as a result of the availability
of stronger and larger diameter coiled tubing.



Generally, the Coiled Tubing & Wireline Products group supplies customers with the equipment and components necessary to use coiled tubing, which the customers typically purchase separately. The groups coiled tubing product
line consists of coiled tubing units, coiled tubing pressure control equipment, pressure pumping equipment, snubbing units (which are units that force tubulars into a well when pressure is contained within the wellbore), nitrogen pumping equipment
and cementing, stimulation and blending equipment. The group markets its coiled tubing equipment under the Hydra Rig®brand name primarily to providers of coiled tubing drilling and workover services. The Companys primary coiled tubing unit production facilities are located at its Hydra Rig facility in Fort Worth, Texas. In addition, the
group markets coiled tubing pressure control equipment under the Texas Oil Tools®brand name and manufactures
this equipment at its facility in Conroe, Texas. The Company acquired Weston Oilfield Engineering Limited in Norwich, United Kingdom, in December 1998, which strengthened its coiled tubing unit refurbishing, servicing and spare parts business, as
well as added new cryogenic nitrogen technologies. The Companys 2001 acquisition of Bradon Industries added a significant manufacturing plant in Canada, where it sells equipment now under the brand name Hydra Rig Canada. It also added
additional nitrogen-pumping products and technologies through its 2001 acquisition of



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Albins Enterprises in Duncan, Oklahoma. Additionally, the Company began offering its TEM cementing equipment and fabricating nitrogen pumping units in Tulsa, Oklahoma, in December 1997, when it acquired Tulsa Equipment
Manufacturing Company.



Wireline
Products.    Through its 1996 acquisitions of SSR (International) Ltd. and Pressure Control Engineering Ltd., its 1998 acquisition of Hydrolex and Eastern Oil Tools Pte. Ltd, and its 2001 acquisition of Elmar Services, Ltd.,
the Company offers a comprehensive line of wireline units and related pressure control products, with manufacturing facilities in Poole and Aberdeen, in the United Kingdom; Perth, Australia; and Singapore. The Companys acquisition of Eastern
Oil Tools Pte. Ltd. in June, 1998 and Elmar Services Ltd. in August, 2001 also added perforating guns and sand control screens to its offering of products.



The Companys wireline products include wireline drum units, which consist of a spool or drum of wireline cable, mounted in a mobile
vehicle or skid, which works in conjunction with a source of power (an engine mounted in the vehicle or within a separate power pack skid). The wireline drum unit is used to spool wireline cable into or out of a well, in order to perform
surveys inside the well, sample fluids from the bottom of the well, retrieve or replace components from inside the well, or to perform other well remediation or survey operations. The wireline used may be slickline, which is conventional
steel cable used to convey tools in or out of the well, or electric line, which contains an imbedded single-conductor or multi-conductor electrical line which permits communication between the surface and electronic instruments attached
to the end of the wireline at the bottom of the well.



Wireline units are usually used in conjunction with a variety of other pressure control equipment which permit safe access into wells while they are flowing and under pressure at the surface. The company engineers and manufactures a
broad range of pressure control equipment for wireline operations, including wireline blow out preventers, strippers, packers, lubricators and grease injection units. Additionally, the Company makes wireline rigging equipment such as mast trucks,
sheaves, and other items, and offers wireline tools through its Pressure Control Engineering Ltd. business.



The Company has a history of engineering new technologies and products for its Coiled Tubing & Wireline Products markets. It recently
introduced the DSH Sidedoor Stripper/Packer, which allows packer and bushing replacement while the operator has coiled tubing in the wellbore, and the CT Slimhole BHA Jetting Tool Assembly, a small diameter jetting tool which can
traverse small diameter well completion configurations.



The Companys customers for Coiled Tubing & Wireline Products include major oil and gas coiled tubing service companies, as well as major oil companies, national oil companies, and small independents. Competitors in Coiled
Tubing & Pressure Control Products include Stewart & Stevenson Inc.; Precision Tube Technology (a division of Maverick Tube Corporation); Aker Kavaerner AS; ASEP; National Oilwell Inc.; Crown Energy Technologies; and several smaller
competitors.



2002 Acquisitions



In 2002, the Company made the following acquisitions and
related transactions:



|Acquisition                             |  | Form                              |  | Product Line      |  | Date of Transactions
|--------------------------------------- |  | --------------------------------- |  | ----------------- |  | --------------------
|A&A Tubular Inspection, Inc.            |  | Asset Purchase                    |  | Tubular Services  |  | January 2002        
|Environmental Rig Solutions, L.P.       |  | Asset Purchase                    |  | Drilling Services |  | February 2002       
|NDT Systems & Services AG               |  | Minority Interest Investment      |  | Tubular Services  |  | April 2002          
|Lobo Systems, L.L.C.                    |  | Asset Purchase                    |  | Drilling Services |  | May 2002            
|W.P.S. Nigeria                          |  | Asset Purchase                    |  | Drilling Services |  | May 2002            
|ICO Oilfield Services                   |  | Stock Purchase and Asset Purchase |  | Tubular Services  |  | September 2002      
|Marr Associates PipelineIntegrity, Ltd. |  | Asset Purchase                    |  | Tubular Services  |  | December 2002       



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The Company
acquired substantially all of the assets of the oilfield services business of ICO, Inc., including the stock of its operating subsidiary in Canada, for total consideration of $138.6 million, consisting of cash of $136.2 million and accrued payables
of $2.4 million. In addition, the Company paid $15.0 million for the remaining acquisitions in 2002.



Seasonal Nature of the Companys Business



Historically, the level of some of the Companys business has followed seasonal trends to some degree. In general the Drilling
Equipment Sales group has not experienced significant seasonal fluctuation. However, there can be no guarantee that seasonal effects will not influence future drilling equipment sales.



In past years, the Companys Tubular Services and Drilling Services businesses in the United States
realized lower activity levels during the first quarter of the calendar year due to delays in the approval of drilling budgets and weather restrictions. The Companys Tubular Services (specifically, tubular inspection and tubular coating) and
Drilling Services (both solids control and rig instrumentation) businesses in Canada typically realized high first quarter activity levels, as operators took advantage of the winter freeze to help gain access to remote drilling and production areas.
These businesses then typically declined during the second quarter due to warming weather conditions which resulted in thawing, softer ground, difficulty accessing drill sites, and road bans that curtailed drilling activity. In past years, Tubular
Services activity in both the United States and Canada increased during the third quarter and then peaked in the fourth quarter as operators spent the remaining drilling and/or production capital budgets for the year.



The pipeline inspection portion of Tubular Services has
typically experienced reduced activity during the first quarter of the calendar year. The high winter demand for gas and petroleum products in the northern states and the consequent curtailment of pipeline maintenance and inspection programs has
resulted in less opportunity to perform pipeline inspection during this time. During the second quarter, activity has typically begun to increase and normally has continued at relatively stable levels through the end of the year as operators
finished scheduled maintenance programs. Mill system sales and industrial inspection services have had no particular seasonal trend. The timing of mill equipment sales is not easily predictable and, accordingly, revenue tends to fluctuate from
quarter to quarter.



In general, Coiled Tubing
& Wireline Products have experienced lower revenue in the fourth quarter due to major customers placing orders, based on their budgeting process, in the fourth quarter for delivery during the next three quarters. This process may change in the
future as a major customer has changed to a continuous budgeting process and will place orders throughout the year. There can be no guarantees that this trend will continue or that any other customer will change its ordering process.



The Company anticipates that these seasonal trends will
continue. However, there can be no guarantee that spending by the Companys customers will continue or that other customers will remain the same as in prior years.



Marketing & Distribution Network



The Companys products are marketed through a sales organization and a network of agents and
distributors, which spans most major oilfield markets.



The Companys Drilling Equipment Sales customers include private and government-owned oil companies, drilling contractors, drilling rig manufacturers, rental tool companies, and supply companies, which supply oilfield products
to the end users of the Companys products. Drilling Equipment purchases can represent significant capital expenditures, and are often sold as part of a rig fabrication or major rig refurbishment package. Sometimes these packages cover multiple
rigs, and often the Company bids jointly with other related product and services providers, such as rig fabrication yards and rig design firms.



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The
Companys Tubular Services customers include major and independent oil and gas companies, national oil companies, oilfield equipment and product distributors and manufacturers, drilling and workover contractors, oilfield service companies,
pipeline operators, steel mills, and other industrial companies. Certain tubular inspection and tubular coating products and services often are incorporated as a part of a tubular package sold by tubular supply stores to end users. Tubular Services
primarily has direct operations in the international marketplace, but operates through agents in certain markets.



The Companys Drilling Services customers are predominantly major and independent oil and gas companies, national oil companies and
drilling contractors. The Drilling Services group operates sales and distribution facilities at strategic locations worldwide to service areas with high drilling activity. The Companys worldwide solids control and instrumentation sales
employees are complemented by service and engineering facilities which provide specialty repair and maintenance services to customers. Sales of capital equipment are sometimes made through rig fabricators, and often are bid as part of a rig
fabrication package or rig refurbishment package. Sometimes these packages cover multiple rigs, and often the Company bids jointly with other related service providers.



The Companys Coiled Tubing and Wireline Products customers include major oil and gas coiled tubing
service companies, as well as major oil companies, national oil companies, and small independents. The products are sold directly to end users through a worldwide Coiled Tubing & Wireline Products sales organization or through the Companys
sales agents. The Company also has in place certain exclusive alliances with major oilfield services companies to provide pressure control equipment.



The Companys foreign operations, which include significant operations in Canada, Europe, the Far East, the Middle East and Latin
America, are subject to the risks normally associated with conducting business in foreign countries, including foreign currency exchange risks and uncertain political and economic environments, which may limit or disrupt markets, restrict the
movement of funds or result in the deprivation of contract rights or the taking of property without fair compensation. Government-owned petroleum companies located in some of the countries in which the Company operates have adopted policies (or are
subject to governmental policies) giving preference to the purchase of goods and services from companies that are majority-owned by local nationals. As a result of such policies, the Company relies on joint ventures, license arrangements and other
business combinations with local nationals in these countries. In addition, political considerations may disrupt the commercial relationship between the Company and such government-owned petroleum companies. Although the Company has not experienced
any significant problems in foreign countries arising from nationalistic policies, political instability, economic instability or currency restrictions, there can be no assurance that such a problem will not arise in the future. See Note 12 of the
Notes to the Consolidated Financial Statements for information regarding geographic revenue information.



Research and New Product Development and Intellectual Property



The Company believes that it has been a leader in the development of new technology and equipment to enhance the safety and productivity
of the drilling and the well stimulation process and that its sales and earnings have been dependent, in part, upon the successful introduction of new or improved products. Additionally, the Company believes that its market position in its major
businesses is enhanced by its leading technologies and reputation for innovation and expertise. Through its internal development programs and certain acquisitions, the Company has assembled an extensive array of technologies protected by a
substantial number of trade and service marks, patents, trade secrets, and other proprietary rights.



As of December 31, 2002, the Company held a substantial number of United States patents and had patent applications pending. Expiration
dates of such patents range from 2003 to 2019. As of such date, the Company also had foreign patents and patent applications pending relating to inventions covered by the United States patents. Additionally, the Company maintains a substantial
number of trade and service marks and maintains a number of trade secrets.



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Although the
Company believes that this intellectual property has value, competitive products with different designs have been successfully developed and marketed by others. The Company considers the quality and timely delivery of its products, the service it
provides to its customers and the technical knowledge and skills of its personnel to be more important than its intellectual property in its ability to compete. While the Company stresses the importance of its research and development programs, the
expense and market uncertainties associated with the development and successful introduction of new products are such that there can be no assurance that the Company will realize future revenues from new products.



Engineering and Manufacturing



The manufacturing processes for the Companys products
generally consist of machining, welding and fabrication, heat treating, assembly of manufactured and purchased components and testing. Most equipment is manufactured primarily from alloy steel, and the availability of alloy steel castings, forgings,
purchased components and bar stock is critical to the production and timing of shipments. Within the Drilling Equipment Sales group, automated Roughnecks, Top Drive Drilling Systems, and pipe handling systems are manufactured in Orange, California;
pressure control and motion compensation equipment, riser pipe and riser tensioners are manufactured at facilities in Houston, Texas; rotating and handling tools are manufactured at facilities in Etten-Leur, the Netherlands, and Mexicali, Mexico;
and derricks and structural rig components are manufactured in Great Yarmouth, England.



The Companys Drilling Services group manufactures or assembles the equipment and products which it rents and sells to customers, and which it uses in providing solids control services. In
addition to producing new solids control and instrumentation equipment and products, Drilling Services also produces spare parts for sale. Drilling Services manufactures screens used in its solids control operations and for sale to others at its New
Iberia, Louisiana; Conroe, Texas; Leduc, Alberta; and Couva, Trinidad facilities; manufactures solids control equipment at its facilities in Houston, Texas; Conroe, Texas; and Aberdeen, Scotland; and manufactures instrumentation equipment at its
Cedar Park, Texas facility.



The Tubular Services
group manufactures tubular inspection equipment and instrumented pipeline inspection tools at its Houston, Texas facility for resale, and renovates and repairs equipment at its manufacturing facilities in Houston, Texas; Bordon, England; Celle,
Germany; Nisku, Alberta and Aberdeen, Scotland. Fiberglass and composite tubulars and fittings are manufactured at its San Antonio, Texas; Big Spring, Texas; Little Rock, Arkansas; Tulsa, Oklahoma; Wichita, Kansas; and Harbin, China facilities,
while tubular coatings are manufactured in its Houston, Texas facility, or through restricted sale agreements with third party manufacturers.



The Coiled Tubing and Wireline Products group manufactures coiled tubing units, wireline units, pressure pumping equipment, pressure
control equipment; sand control screens and perforating guns at its Fort Worth, Texas; Conroe, Texas; Houston, Texas; Duncan, Oklahoma; Tulsa, Oklahoma; Calgary, Canada; Aberdeen, Scotland; Singapore; Perth, Australia; and Poole, England facilities.



Certain of the Companys manufacturing
facilities and certain of the Companys products have various certifications, including, ISO 9001, API and ASME.



Raw Materials



The Company believes that materials and components used in its servicing and manufacturing operations and purchased for sales are readily
available at competitive prices from numerous sources.



Backlog



Sales of the
Companys products are made on the basis of written purchase orders or contracts and, consistent with industry practice, by e-mail, fax, letter or oral commitment later confirmed by a written order. In



17



---

accordance with industry practice, orders and commitments generally can be cancelled by customers at any time. In addition, orders and
commitments are sometimes modified before or during manufacture of the products. The Companys backlog is based upon anticipated revenues from customer orders that the Company believes are firm. The level of backlog at any particular time is
not necessarily indicative of the future operating performance of the Company.



Backlog at December 31, 2002, 2001, and 2000 was as follows (in thousands):



|                                  |  | December 31,
|--------------------------------- |  | ------------
|                                  |  | 2002        
|Drilling Equipment Sales          |  | $           
|Coiled Tubing & Wireline Products |  |             
|                                  |  |             
|Total                             |  | $           
|                                  |  |             



The
Company expects that most of the backlog will be shipped by December 31, 2003.



Environmental Matters



The Companys manufacturing processes and its inspection, coating and solids control services routinely involve the handling and disposal of chemical substances and waste materials, some of which may be considered to be
hazardous wastes. These potential hazardous wastes result primarily from the manufacturing and testing processes and the use of mineral spirits to clean pipe threads during the tubular inspection process and from the coating process, and the
handling of and, in normal cases, the disposal of drilling fluids and cuttings on behalf of the drillers and/or producers.



The Companys operations are subject to numerous local, state and federal laws and regulations, including the regulations promulgated
by the Occupational Safety and Health Administration, the United States Environmental Protection Agency (EPA), the Nuclear Regulatory Commission and the United States Department of Transportation. These laws and regulations include the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA), the Resource Conservation and Recovery Act (RCRA), the Clean Air Act (CAA), the Clean Water Act (CWA), the Superfund Amendments and Reauthorization Act (SARA) including SARA Title III
toxic release reporting, the Safe Drinking Water Act (SDWA) and the Toxic Substance Control Act (TSCA). Management believes that the Company is in substantial compliance with these laws and regulations, and that the compliance and remedial action
costs associated with these laws and regulations have not had a material adverse effect on its results of operations, financial condition or competitive position, to date.



The Company cannot predict the effect on it of new laws and regulations with respect to radioactive hazardous
wastes caused by naturally occurring radioactive materials or with respect to other environmental matters. Circumstances or developments which are not currently known as well as the future cost of compliance with environmental laws and regulations
could be substantial and could have a material adverse effect on the results of operations and financial condition of the Company.



CERCLA imposes liability, without regard to fault or the legality of the original conduct, for the releases of hazardous substances into
the environment. Persons subject to CERCLA include the owner and operator of the disposal site or sites where the release occurred and companies that generated, disposed or arranged for the disposal of the hazardous wastes found at the site. Persons
who are responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the resulting contamination and for damages to natural resources. It is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.



Certain third-party owned disposal facilities used by the Company or its subsidiaries have been investigated
under state and federal Superfund statutes, and the Company is currently named as a potentially responsible party



18



---

for cleanup at three such sites. Although the Companys level of involvement varies at each site, in general, the Company is one of
numerous parties named and will be obligated to pay an allocated share of the cleanup costs. While it is not feasible to predict the outcome of these matters with certainty, management is of the opinion that their ultimate resolution should not
result in material costs to the Company or otherwise materially and adversely affect the Companys operations or financial position.



Pursuant to an agreement executed as part of the acquisition of the Company in 1988 from Minstar Inc. (Minstar), Minstar has
agreed, subject to certain limitations concerning the time for submitting claims and the amount of losses to be covered as described below, to indemnify the Company with respect to all losses, liabilities, damages and expenses incurred in connection
with, arising out of or resulting from the production, use, generation, emission, storage, treatment, transportation, disposal or other handling or disposition or migration of any kind of any toxic or hazardous wastes at any time prior to the
closing of the 1988 acquisition date. Claims for indemnification were required to be made before May 13, 1992. Minstar is obligated to indemnify the Company for the first $1 million of losses incurred by the Company and fifty percent of losses in
excess of $2 million. The Company is solely responsible for the second $1 million of losses incurred and fifty percent of losses in excess of $2 million. See Item 3Legal Proceedings for a description of the indemnity to be provided
by Minstar with respect to actions, suits, litigation, proceedings or governmental investigations which may also apply to certain environmental matters.



Employees



At December 31, 2002, the Company had a total of 9,391 employees (of which 1,276 were temporary employees). The Company considers its
relations with its employees to be excellent and has never suffered a work stoppage or interruption due to a labor dispute.





19



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GLOSSARY OF
OILFIELD TERMS



|                                                        |  | (Sources:  Varco management; A Dictionary for the Petroleum Industry, The University of Texas at
Austin, 2001.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                       
|API                                                     |  | Abbr: American Petroleum Institute                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                       
|Annular Blowout Preventer                               |  | A large valve, usually installed above the ram blowout preventers, that forms a seal in the annular space between the
pipe and the wellbore or, if no pipe is present, in the wellbore itself.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                       
|Annulus                                                 |  | The open space around pipe in a wellbore through which fluids may pass.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                       
|Automatic Pipe Handling Systems (Automatic Pipe Racker) |  | A device used on a drilling rig to automatically remove and insert drill stem components from and into the hole. It
replaces the need for a person to be in the derrick or mast when tripping pipe into or out of the hole.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                       
|Automatic Roughneck                                     |  | A large, self-contained pipe-handling machine used by drilling crew members to make up and break out tubulars. The device
combines a spinning wrench, torque wrench, and backup wrenches.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                       
|Beam pump                                               |  | Surface pump that raises and lowers sucker rods continually, so as to operate a downhole pump.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                       
|Bit                                                     |  | The cutting or boring element used in drilling oil and gas wells. The bit consists of a cutting element and a circulating
element. The cutting element is steel teeth, tungsten carbide buttons, industrial diamonds, or polycrystalline diamonds (PDCs). These teeth, buttons, or diamonds penetrate and gouge or scrape the formation to remove it. The circulating element
permits the passage of drilling fluid and utilizes the hydraulic force of the fluid stream to improve drilling rates. In rotary drilling, several drill collars are joined to the bottom end of the drill pipe column, and the bit is attached to the end
of the drill collars. Drill collars provide weight on the bit to keep it in firm contact with the bottom of the hole. Most bits used in rotary drilling are roller cone bits, but diamond bits are also used extensively.
|                                                       
|Blowout                                                 |  | An uncontrolled flow of gas, oil or other well fluids into the atmosphere. A blowout, or gusher, occurs when formation
pressure exceeds the pressure applied to it by the column of drilling fluid. A kick warns of an impending blowout.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                       
|Blowout Preventer (BOP)                                 |  | Series of valves installed at the wellhead while drilling to prevent the escape of pressurized
fluids.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                       
|Blowout Preventer (BOP) Stack                           |  | The assembly of well-control equipment including preventers, spools, valves, and nipples connected to the top of the
wellhead.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                       
|Closed Loop Drilling Systems                            |  | A solids control system in which the drilling mud is reconditioned and recycled through the drilling process on the rig
itself.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                       
|Coiled Tubing                                           |  | A continuous string of flexible steel tubing, often hundreds or thousands of feet long, that is wound onto a real, often
dozens of feet in diameter. The reel is an integral part of the coiled tubing unit, which consists of several devices that ensure the tubing can be safely and efficiently inserted into the well from the surface. Because tubing can be lowered into a
well without having to make up joints of tubing, running coiled tubing into the well is faster and less expensive than running conventional tubing. Rapid advances in the use of coiled tubing make it a popular way in which to run tubing into and out
of a well. Also called reeled tubing.                                                                                                                                                                                 



20



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|Cuttings                       |  | Fragments of rock dislodged by the bit and brought to the surface in the drilling mud. Washed and dried cutting samples
are analyzed by geologist to obtain information about the formations drilled.                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                              
|Directional Well               |  | Well drilled in an orientation other than vertical in order to access broader portions of the
formation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                              
|Drawworks                      |  | The hoisting mechanism on a drilling rig. It is essentially a large winch that spools off or takes in the drilling line
and thus raises or lowers the drill stem and bit.                                                                                                                                                                                                                                                                                                                                                                                                        
|                              
|Drill Pipe Elevator (Elevator) |  | On conventional rotary rigs and top-drive rigs, hinged steel devices with manual operating handles that crew members
latch onto a tool joint (or a sub). Since the elevators are directly connected to the traveling block, or to the integrated traveling block in the top drive, when the driller raises or lowers the block or the top-drive unit, the drill pipe is also
raised or lowered.                                                                                                                                                                                  
|                              
|Drilling Mud                   |  | A specially compounded liquid circulated through the wellbore during rotary drilling operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                              
|Drilling riser                 |  | A conduit used in offshore drilling through which the drill bit and other tools are passed from the rig on the
waters surface to the sea floor.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                              
|Drill Stem                     |  | All members in the assembly used for rotary drilling from the swivel to the bit, including the Kelly, the drill pipe and
tool joints, the drill collars, the stabilizers, and various specialty items.                                                                                                                                                                                                                                                                                                                                                                           
|                              
|Formation                      |  | A bed or deposit composed throughout of substantially the same kind of rock; often a lithologic unit. Each formation is
given a name, frequently as a result of the study of the formation outcrop at the surface and sometimes based on fossils found in the formation.                                                                                                                                                                                                                                                                                                         
|                              
|Iron Roughneck                 |  | A floor-mounted combination of a spinning wrench and a torque wrench. The Iron Roughneck moves into position
hydraulically and eliminates the manual handling involved with suspended individual tools.                                                                                                                                                                                                                                                                                                                                                                          
|                              
|Jack-up rig                    |  | A mobile bottom-supported offshore drilling structure with columnar or ope-truss legs that support the deck and hull.
When positioned over the drilling site, the bottoms of the legs penetrate the seafloor.                                                                                                                                                                                                                                                                                                                                                                    
|                              
|Joint                          |  | 1)  In drilling, a single length (from 16 feet to 45 feet, or 5 meters to 14.5 metres, depending on its range
length) of drill pipe, drill collar, casing or tubing that has threaded connections at both ends. Several joints screwed together constitute a stand of pipe. 2)  In pipelining, a single length (usually 40 feet-12 metres) of pipe.
3)  In sucker rod pumping, a single length of sucker rod that has threaded connections at both ends.                                                                                                                         
|                              
|Kelly                          |  | The heavy steel tubular device, four-  or six-sided, suspended from the swivel through the rotary table and
connected to the top joint of drill pipe to turn the drill stem as the rotary table returns. It has a bored passageway that permits fluid to be circulated into the drill stem and up the annulus, or vice versa. Kellys manufactured to API
specifications are available only in four-  or six-sided versions, are either 40 or 54 feet (12 to 16 metres) long, and have diameters as small as 21/2inches (6 centimetres) and as large as 6 inches (15 centimetres).



21



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|Kelly Bushing                 |  | A special device placed around the kelly that mates with the kelly flats and fits into the master bushing of the
rotary table. The kelly bushing is designed so that the kelly is free to move up or down through it. The bottom of the bushing may be shaped to fit the opening in the master bushing or it may have pins that fit into the master bushing. In either
case, when the kelly bushing is inserted into the master bushing and the master bushing is turned, the kelly bushing also turns. Since the kelly bushing fits onto the kelly, the kelly turns, and since the kelly is made up to the drill stem, the
drill stem turns. Also called the drive bushing.
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                             
|Kelly Spinner                 |  | A pneumatically operated device mounted on top of the kelly that, when actuated, causes the kelly to turn or spin. It
is useful when the kelly or a joint of pipe attached to it must be spun up, that is, rotated rapidly for being made up.                                                                                                                                                                                                                                                                                                                                                                                                                               
|                             
|Kick                          |  | An entry of water, gas, oil, or other formation fluid into the wellbore during drilling. It occurs because the
pressure exerted by the column of drilling fluid is not great enough to overcome the pressure exerted by the fluids in the formation drilled. If prompt action is not taken to control the kick, or kill the well, a blowout may
occur.                                                                                                                                                                                                                                                                                                                      
|                             
|Making-up                     |  | 1.  To assemble and join parts to form a complete unit (e.g., to make up a string of drill pipe).
2.  To screw together two threaded pieces. Compare break out. 3.  To mix or prepare (e.g., to make up a tank of mud). 4. To compensate for (e.g., to make up for lost time).                                                                                                                                                                                                                                                                                                                                                                                              
|                             
|Manual Tongs (Tongs)          |  | The large wrenches used for turning when making up or breaking out drill pipe, casing, tubing, or other pipe;
variously called casing tongs, pipe tongs, and so forth, according to the specific use. Power tongs or power wrenches are pneumatically or hydraulically operated tools that serve to spin the pipe up tight and, in some instances to apply the final
makeup torque.                                                                                                                                                                                                                                                                                         
|                             
|Master Bushing                |  | A device that fits into the rotary table to accommodate the slips and drive the kelly bushing so that the rotating
motion of the rotary table can be transmitted to the kelly. Also called rotary bushing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                             
|Motion Compensation Equipment |  | Any device (such as a bumper sub or heave compensator) that serves to maintain constant weight on the bit in spite of
vertical motion of a floating offshore drilling rig.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                             
|Plug Gauging                  |  | The mechanical process of ensuring that the inside threads on a piece of drillpipe comply with API
standards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                             
|Pressure Control Equipment    |  | 1.  The act of preventing the entry of formation fluids into a wellbore. 2.  The act of
controlling high pressures encountered in a well.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                             
|Pressure Pumping              |  | Pumping fluids into a well by applying pressure at the surface.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                             
|Ram Blowout Preventer         |  | A blowout preventer that uses rams to seal off pressure on a hole that is with or without pipe. Also called a ram
preventer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                             
|Ring Gauging                  |  | The mechanical process of ensuring that the outside threads on a piece of drillpipe comply with API
standards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                             
|Riser                         |  | A pipe through which liquids travel upward.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



22



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|Riser Pipe                                 |  | The pipe and special fitting used on floating offshore drilling rigs to established a seal between the top of the
wellbore, which is on the ocean floor, and the drilling equipment located above the surface of the water. A riser pipe serves as a guide for the drill stem from the drilling vessel to the wellhead and as a conductor or drilling fluid from the well
to the vessel. The riser consists of several sections of pipe and includes special devices to compensate for any movement of the drilling rig caused by waves. Also called marine riser pipe, riser joint.                                                                                                         
|------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                          
|Rotary table                               |  | The principal piece of equipment in the rotary table assembly; a turning device used to impart rotational power to the
drill stem while permitting vertical movement of the pipe for rotary drilling. The master bushing fits inside the opening of the rotary table; it turns the kelly bushing, which permits vertical movement of the kelly while the stem is
turning.                                                                                                                                                                                                                                                                                                                    
|                                          
|Rotating Blowout Preventer (Rotating Head) |  | A sealing device used to close off the annular space around the kelly in drilling with pressure at the surface, usually
installed above the main blowout preventers. A rotating head makes it possible to drill ahead even when there is pressure in the annulus that the weight of the drilling fluid is not overcoming; the head prevents the well from blowing out. It is used
mainly in the drilling of formations that have low permeability. The rate of penetration through such formations is usually rapid.                                                                                                                                                                         
|                                          
|Safety Clamps                              |  | A clamp placed very tightly around a drill collar that is suspended in the rotary table by drill collar slips. Should the
slips fail, the clamp is too large to go through the opening in the rotary table and therefore prevents the drill collar string from falling into the hole. Also called drill collar clamp.                                                                                                                                                                                                                                                                                                                                                                        
|                                          
|Shaker                                     |  | See Shale Shaker                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                          
|Shale Shaker                               |  | A piece of drilling rig equipment that uses a vibrating screen to remove cuttings from the circulating fluid in rotary
drilling operations. The size of the openings in the screen should be selected carefully to be the smallest size possible to allow 100 per cent flow of the fluid. Also called a shaker.                                                                                                                                                                                                                                                                                                                                                                              
|                                          
|Slim-Hole Completions (Slim-hole Drilling) |  | Drilling in which the size of the hole is smaller than the conventional hole diameter for a given depth. This decrease in
hole size enables the operator to run smaller casing, thereby lessening the cost of completion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                          
|Slips                                      |  | Wedge-shaped pieces of metal with serrated inserts (dies) or other gripping elements, such as serrated buttons, that
suspend the drill pipe or drill collars in the master bushing of the rotary table when it is necessary to disconnect the drill stem from the kelly or from the top-drive units drive shaft. Rotary slips fit around the drill pipe and wedge
against the master bushing to support the pipe. Drill collar slips fit around a drill collar and wedge against the master bushing to support the drill collar. Power slips are pneumatically or hydraulically actuated devices that allow the crew to
dispense with the manual handling of slips when making a connection.
|                                          
|Solids                                     |  | See Cuttings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                          
|Spinning Wrench                            |  | Air-powered or hydraulically powered wrench used to spin drill pipe in making or breaking
connections.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                          
|Spinning-in                                |  | The rapid turning of the drill stem when one length of pipe is being joined to another. Spinning-out refers
to separating the pipe.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



23



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|Stand              |  | The connected joints of pipe racked in the derrick or mast when making a trip. On a rig, the usual stand is about 90 feet
(about 27 metres) long (three lengths of drill pipe screwed together), or a thribble.                                                                                                                                                                                                                             
|------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  
|String             |  | The entire length of casing, tubing, sucker rods, or drill pipe run into a hole.                                                                                                                                                                                                                                                                                                                                                            
|                  
|Sucker rod         |  | A special steel pumping rod. Several rods screwed together make up the link between the pumping unit on the surface and
the pump at the bottom of the well.                                                                                                                                                                                                                                                                                 
|                  
|Tensioner          |  | A system of devices installed on a floating offshore drilling rig to maintain a constant tension on the riser pipe,
despite any vertical motion made by the rig. The guidelines must also be tensioned, so a separate tensioner system is provided for them.                                                                                                                                                                                
|                  
|Thermal Desorption |  | The process of removing drilling mud from cuttings by applying heat directly to drilling fluid.                                                                                                                                                                                                                                                                                                                                             
|                  
|Top Drive          |  | A device similar to a power swivel that is used in place of the rotary table to turn the drill stem. It also includes
power tongs. Modern top drives combine the elevator, the tongs, the swivel, and the hook. Even though the rotary table assembly is not used to rotate the drill stem and bit, the top-drive system retains it to provide a place to set the slips to
suspend the drill stem when drilling stops.                      
|                  
|Torque Wrench      |  | Spinning wrench with a gauge for measuring the amount of torque being applied to the connection.                                                                                                                                                                                                                                                                                                                                            
|                  
|Trouble Cost       |  | Costs incurred as a result or unanticipated complications while drilling a well. These cost are often referred to as
contingency costs during the planning phase of a well.                                                                                                                                                                                                                                                                 
|                  
|Well Completion    |  | 1.  The activities and methods of preparing a well for the production of oil and gas or for other purposes,
such as injection; the method by which one or more flow paths for hydrocarbons are established between the reservoir and the surface. 2.  The system of tubulars, packers, and other tools installed beneath the wellhead in the production
casing; that is, the tool assembly that provides the hydrocarbon flow path or paths.
|                  
|Well stimulation   |  | Any of several operations used to increase the production of a well, such as acidizing or
fracturing.                                                                                                                                                                                                                                                                                                                                       
|                  
|Well Workover      |  | The performance of one or more of a variety of remedial operations on a producing oilwell to try to increase production
oilwell to try to increase production. Examples of workover jobs are deepening, plugging back, pulling and resetting liners, and squeeze cementing.                                                                                                                                                                 
|                  
|Wellbore           |  | A borehole; the hole drilled by the bit. A wellbore may have casing in it or it may be open (uncased); or part of it may
be cased, and part of it may be open. Also called a borehole or hole.                                                                                                                                                                                                                                              
|                  
|Wireline           |  | A slender, rodlike or threadlike piece of metal usually small in diameter, that is used for lowering special tools (such
as logging sondes, perforating guns, and so forth) into the well. Also called slick line.                                                                                                                                                                                                                          



24



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ITEM
2.    PROPERTIES



The
Company operates in over 40 countries. The following table describes the major manufacturing, sales, service, distribution, and administrative facilities:



|Location                  |  | Description                                                                                                           |  | Building Size (SF) |  | Property Size (Acres) |  | Owned /Leased  |  | Lease Termination Date
|------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ------------------ |  | --------------------- |  | -------------- |  | ----------------------
|                         
|DRILLING EQUIPMENT SALES: |  |                                                                                                                       |  |                    |  |                       |  |               
|                         
|Houston, Texas            |  | West Little York: Shaffer, MDT, BJ, & Systems Manufacturing Facility, Repair, Service, Administrative & Sales
Offices |  | 619,000            |  | 34.00                 |  | Owned          |  |                       
|                         
|Orange, California        |  | Manufacturing & Office Facility759 N. Eckhoff                                                                        |  | 126,000            |  | 8.90                  |  | BuildingOwned* |  | 04/30/13              
|                         
|Etten-Leur, Netherlands   |  | BJ Mfg. Plant/Sales                                                                                                   |  | 75,000             |  | 6.00                  |  | Owned          |  |                       
|                         
|Aberdeen, Scotland        |  | Systems & Shaffer Sales, Service & Distribution Facility                                                              |  | 63,000             |  | 6.00                  |  | Owned          |  |                       
|                         
|Great Yarmouth, England   |  | Derrick Manufacturing Facilities, Administrative & Sales Offices                                                      |  | 46,208             |  | 2.57                  |  | Leased         |  | 12/03                 
|                         
|Montrose, Scotland        |  | Forties Road Systems Service Center & Office Facility                                                                 |  | 34,000             |  | 3.00                  |  | Owned          |  |                       
|                         
|TUBULAR SERVICES:         |  |                                                                                                                       |  |                    |  |                       |  |               
|                         
|Al Khobar, Saudi Arabia   |  | Reclamation, Inspection Facility & Offices                                                                            |  | 340,203            |  | 8.00                  |  | Leased         |  | 12/31/04              
|                         
|Houston, Texas            |  | Sheldon Road: Inspection Facility                                                                                     |  | 335,993            |  | 192.00                |  | Owned          |  |                       
|                         
|Houston, Texas            |  | Holmes Road Complex: Manufacturing, Warehouse, Corporate Offices, Coating Manufacturing Plant & Pipeline
Services     |  | 300,000            |  | 50.00                 |  | Owned          |  |                       
|                         
|Little Rock, Arkansas     |  | Fiberglass Tubular Manufacturing Plant, R&D Lab, Administrative Offices                                               |  | 262,784            |  | 44.00                 |  | Leased         |  | 10/01/09              
|                         
|Sand Springs, Oklahoma    |  | Fiberglass Tubular Manufacturing Plant                                                                                |  | 189,173            |  | 6.50                  |  | Owned          |  |                       
|                         
|Amelia, Louisiana         |  | Coating Plant & Inspection Facility                                                                                   |  | 179,574            |  | 84.00                 |  | Leased         |  | 12/31/16              
|                         
|Houston, Texas            |  | Coating Plant & Inspection Facility                                                                                   |  | 168,683            |  | 49.00                 |  | Owned          |  |                       
|                         
|Wichita, Kansas           |  | Fiberglass Tubular Manufacturing Plant                                                                                |  | 129,746            |  | 15.00                 |  | Owned          |  |                       
|                         
|Edmonton, Alberta         |  | Sucker Rod Inspection & Oilwell Engine Reclamation                                                                    |  | 121,545            |  | 10.00                 |  | Leased         |  | 12/31/05              
|                         
|Nisku, Alberta            |  | Coating Plant, Inspection Facility                                                                                    |  | 114,000            |  | 30.00                 |  | Owned          |  |                       
|                         
|Amelia, Louisiana         |  | Coating Plant, Inspection & Storage Facilities                                                                        |  | 102,000            |  | 90.00                 |  | BuildingOwned* |  | 05/30/06              
|                         
|Casper, Wyoming           |  | Inspection Facility                                                                                                   |  | 91,720             |  | 29.00                 |  | Owned          |  |                       



25



---

|Location                  |  | Description                                                                                                            |  | Building Size (SF) |  | Property Size (Acres) |  | Owned /Leased   |  | Lease Termination Date
|------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ------------------ |  | --------------------- |  | --------------- |  | ----------------------
|                         
|Midland, Texas            |  | Coating Plant, Reclamation Facility & Technical Service Building                                                       |  | 87,000             |  | 25.00                 |  | Owned           |  |                       
|                         
|Houston, Texas            |  | Highway 90: Coating Plant                                                                                              |  | 83,000             |  | 43.00                 |  | Leased          |  | 07/31/11              
|                         
|San Antonio, Texas        |  | Fiberglass Tubular Manufacturing Plant, R & D Lab, Administrative Offices                                              |  | 76,529             |  | 19.57                 |  | Owned           |  |                       
|                         
|Houston, Texas            |  | Engineering/Technical Research Center                                                                                  |  | 76,000             |  | 6.00                  |  | Owned           |  |                       
|                         
|Navasota, Texas           |  | Coating Plant, Inspection Pipe Storage                                                                                 |  | 65,000             |  |                       |  | Building Owned* |  | 06/30/13              
|                         
|Tuas, Singapore           |  | Coating Plant & Inspection Facility                                                                                    |  | 50,644             |  | 8.00                  |  | BuildingOwned*  |  | 06/09                 
|                         
|Nisku, Alberta            |  | Trucking, Coating, Inspection & Storage Facility                                                                       |  | 32,550             |  | 155.00                |  | Owned           |  |                       
|                         
|DRILLING SERVICES:        |  |                                                                                                                        |  |                    |  |                       |  |                
|                         
|Cedar Park, Texas         |  | Instrumentation Manufacturing Facility, Administrative & Sales Offices                                                 |  | 205,000            |  | 40.00                 |  | Owned           |  |                       
|                         
|Conroe, Texas             |  | Solids Control & Pressure Control Manufacturing Facility, Warehouse, Administrative & Sales Offices &
Engineering Labs |  | 160,000            |  | 30.49                 |  | Owned           |  |                       
|                         
|Bogota, Colombia          |  | Solids Control Yard & Warehouse                                                                                        |  | 73,312             |  |                       |  | Leased          |  | 08/31/03              
|                         
|Aberdeen, Scotland        |  | Solids Control Manufacturing Facility Assembly, Administrative, Sales                                                  |  | 71,200             |  | 6.25                  |  | Leased          |  | 2004                  
|                         
|Leduc, Alberta            |  | MDT, Shaffer, Chimo, Alberta Instruments, Varco Services & Warehouse Facility                                          |  | 64,056             |  | 4.60                  |  | Owned           |  |                       
|                         
|Leduc, Alberta            |  | Solids Control Equipment Rental & Services Facility                                                                    |  | 41,340             |  | 9.36                  |  | Owned           |  |                       
|                         
|Lafayette, Louisiana      |  | Highway 90 East Complex: Solids Control Service Facility, Warehouse & Administrative Offices                           |  | 12,075             |  | 0.98                  |  | Owned           |  |                       
|                         
|COILED TUBING / WIRELINE: |  |                                                                                                                        |  |                    |  |                       |  |                
|                         
|Aberdeen, Scotland        |  | Tubular & Pressure Control Manufacturing, Administrative & Sales                                                       |  | 85,152             |  | 7.10                  |  | Leased          |  | 08/31/19              
|                         
|Fort Worth, Texas         |  | Coiled Tubing Manufacturing Facility, Warehouse, Administrative & Sales Offices                                        |  | 75,200             |  | 9.67                  |  | Owned           |  |                       
|                         
|Duncan, Oklahoma          |  | Nitrogen Units Manufacturing Facility, Warehouse & Offices                                                             |  | 67,600             |  | 13.28                 |  | Owned           |  |                       



26



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|Location         |  | Description                                                          |  | Building Size (SF) |  | Property Size (Acres) |  | Owned/Leased |  | Lease Termination Date
|---------------- |  | -------------------------------------------------------------------- |  | ------------------ |  | --------------------- |  | ------------ |  | ----------------------
|                
|Calgary, Alberta |  | Coiled Tubing Manufacturing Facility, Administrative & Sales Offices |  | 48,040             |  | 2.52                  |  | Owned        |  |                       
|                
|Al Quoz, UAE     |  | Tubular & Pressure Control Office & Workshop                         |  | 41,000             |  | 0.94                  |  | Leased       |  | 08/31/04              
|                
|Tulsa, Oklahoma  |  | Nitrogen Units & Pump Manufacturing Facility, Warehouse & Offices    |  | 40,700             |  | 4.47                  |  | Leased       |  | 12/31/07              
|                
|CORPORATE:       |  |                                                                      |  |                    |  |                       |  |              |  |                       
|                
|Houston, Texas   |  | Corporate Administrative Office                                      |  | 14,500             |  | Office Tower          |  | Leased       |  | 08/31/11              

---

|* |  | Building owned subject to a ground lease.
|- |  | -----------------------------------------



The Company owns undeveloped acreage next to several of its facilities, including over 100 acres of undeveloped property located in
Houston, Texas. Machinery, equipment, buildings, and other facilities owned and leased are considered by management to be adequately maintained and adequate for the Companys operations.



ITEM 3.    LEGAL PROCEEDINGS



The following discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to the Companys legal proceedings described below. Litigation is inherently uncertain and may
result in adverse rulings or decisions. Additionally, the Company may enter into settlements or be subject to judgments which may, individually or in the aggregate, have a material adverse effect on the Companys results of operations.
Accordingly, actual results could differ materially from those projected in the forward-looking statements.



The Company is involved in numerous legal proceedings which arise in the ordinary course of its business. The Company is unable to predict
the outcome of these proceedings; however, management believes that none of these legal proceedings will have a material adverse effect on the results of operations or financial condition of the Company. Notwithstanding the foregoing, there can be
no absolute assurance that the indemnity from Minstar discussed below or the Companys insurance coverage will be sufficient to protect the Company from incurring substantial liability as a result of these proceedings.



The Company has been party to two lawsuits that allege
wrongful death or injury of former employees resulting from exposure to silica and silica dust during employment with the Company, both of which have been settled. These settlements have been made on the Companys behalf by the Companys
and Minstars insurance carriers without financial loss to the Company. The Company is aware of the possibility that suits may be brought against it by other former employees alleging exposure to silica and silica dust during their employment
with the Company. These suits may involve claims for wrongful death under a theory of gross negligence and claims for punitive damages, the amounts of which could be substantial but cannot be predicted. Additionally, the Company has been sued in the
past for claims arising out of allegations of exposure to silica, asbestos, benzene and certain other substances alleged to have been used primarily during its processes in the 1960s, 1970s, and early 1980s. The Company believes that, based upon
insurance and indemnification from Minstar, any such potential claims, if asserted, would not have a material adverse effect on the Companys results of operations or financial condition.





27



---

Pursuant to an agreement executed in connection with the acquisition of the Company in
1988, Minstar agreed to hold the Company harmless from and against any and all losses, liabilities, damages, deficiencies and expenses (in excess of $1.5 million in the aggregate) arising out of product and/or general liability claims arising out of
occurrences on or prior to the closing of the acquisition. In addition, Minstar agreed to hold the Company harmless from any and all losses, liabilities and damages, deficiencies and expenses related to any action, suit, litigation, proceeding or
governmental investigation existing or pending on or prior to the closing of the acquisition. Minstars obligations to indemnify the Company are subject to limitations concerning the time for submitting claims and the amount of losses to be
covered. There is a dispute with Minstar concerning whether the indemnification referenced above is applicable only if the claim is the type that would be covered by a product or general liability insurance policy. The Company firmly maintains that
all suits or claims are the responsibility of Minstar when the event giving rise to liability occurred prior to the closing of the acquisition. No assurance can be given, however, that Minstar will not contest responsibility for future suits,
including those filed under theories of gross negligence. Management believes that Minstar is responsible for indemnifying it with respect to all of the aforementioned lawsuits subject in certain instances to the $1.5 million basket. In addition,
while management believes certain liability arising from certain of the above described suits will be covered by insurance, such suits may be subject to a reservation of rights and the coverage could be contested by the carriers providing such
insurance.



The Company is a defendant and
counter-plaintiff in a litigation styled Lexington Ins. Co. v. Varco International, Inc., Advanced Wirecloth, Inc., Environmental Procedures, Inc. et al. (Cause No. 2001-49363), which was filed in the 164thDistrict Court for Harris County, Texas on September 25, 2001. Plaintiff is seeking a declaration of its rights and obligations under several insurance
policies under which the Company is insured. Specifically, plaintiff is seeking a declaration that it does not owe the Company a duty to pay for its costs of defense or to indemnify the Company for settlement costs incurred in connection with two
lawsuits brought by Derrick Manufacturing Corporation, each of which has been settled. Additionally, plaintiff seeks to recover amounts previously paid to the Company as partial payment for its defense of the Derrick Manufacturing cases. The Company
disputes the plaintiffs claims and has asserted counterclaims for breach of the insurance policies, violations of the Texas Insurance Code and Texas Deceptive Trade Practices Act, fraud and common law bad faith. The Company seeks to recover
costs incurred in defending and settling the Derrick Manufacturing cases, as well as statutory and punitive damages.



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



No matters were submitted to a vote of stockholders during the fourth quarter of 2002.



28



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PART II



ITEM 5.    MARKETS FOR REGISTRANTS COMMON EQUITY STOCK AND
RELATED STOCKHOLDER MATTERS



The
Companys common stock is traded on the New York Stock Exchange (NYSE) under the symbol VRC. The following table sets forth, for the calendar periods indicated, the range of high and low closing prices for the common stock, as
reported by the NYSE:



|            |  | 2002  |  | 2001 
|----------- |  | ----- |  | -----
|            |  | High  |  | Low  
|1st Quarter |  | 20.10 |  | 13.25
|2nd Quarter |  | 21.73 |  | 17.54
|3rd Quarter |  | 18.60 |  | 13.55
|4th Quarter |  | 18.91 |  | 14.94



The
closing price of the Companys common stock on March 7, 2003 was $19.05. The approximate number of stockholders of record on March 7, 2003 was 1,170.



Holders of the Companys common stock are entitled to such dividends as may be declared from time to time by the Companys Board
of Directors out of funds legally available therefore. The Company has not declared or paid any dividends on its common stock since its inception and does not currently plan to declare or pay any dividends.



29



---



ITEM
6.    SELECTED FINANCIAL DATA



The information below is presented in order to highlight significant trends in the Companys results from operations and financial condition.



|                                                       |  | Years Ended December 31,                                |          
|------------------------------------------------------ |  | ------------------------------------------------------- | ---------
|                                                       |  | 2002                                                    |          
|                                                       |  | (Dollars in thousands, except ratio and per share data) |          
|Statement of Income Data:                              |  |                                                         |          
|Revenue                                                |  | $                                                       | 1,335,064
|Operating profit(1)                                    |  |                                                         | 156,065  
|Net income(2)                                          |  | $                                                       | 79,807   
|                                                       |  |                                                         |          
|Basic earnings per common share(2)                     |  | $                                                       | 0.83     
|                                                       |  |                                                         |          
|Dilutive earnings per common share(2)                  |  | $                                                       | 0.82     
|                                                       |  |                                                         |          
|                                                      
|Other Data:                                            |  |                                                         |          
|Net cash provided by operating activities              |  | $                                                       | 101,783  
|Cash flows used for investing activities               |  | $                                                       | (202,333 
|Cash flows provided by (used for) financing activities |  | $                                                       | 148,377  
|Earnings per common share before goodwill amortization |  | $                                                       | 0.82     
|EBITDA(3)                                              |  | $                                                       | 207,633  
|Ratio of EBITDA to interest expense(4)                 |  |                                                         | 8.1x     
|Ratio of earnings to fixed charges(5)                  |  |                                                         | 4.7x     
|Depreciation and amortization                          |  | $                                                       | 59,246   
|Capital expenditures                                   |  | $                                                       | 49,377   
|                                                      
|Balance Sheet Data (end of period):                    |  |                                                         |          
|Working capital                                        |  | $                                                       | 529,647  
|Total assets                                           |  |                                                         | 1,661,060
|Total debt                                             |  |                                                         | 467,928  
|Common stockholders equity                            |  |                                                         | 920,282  

---

|(1) |  | The 1998 operating profit includes $1.5 million write-off of rental equipment and $0.9 million allowance for abandoned leases and other obligations. Excluding these
charges, operating profit was $187.6 million. The 1999 operating profit includes $7.8 million of transaction costs and write-offs associated with the terminated Newpark merger. Excluding these costs, operating profit was $75.2 million. The 2000
operating profit includes $9.7 million of financial advisor fees, $4.3 million of compensation costs, $5.1 million to fully vest employees participating in the Executive Stock Match program, $3.5 million in equipment rationalization charges and $3.9
million of other transaction costs associated with the May 2000 merger between Varco and Tuboscope. Excluding these costs, operating profit was $87.5 million. The 2001 operating profit includes $16.5 million of litigation costs. Excluding these
costs, operating profit was $174.6 million. The 2002 operating profit includes $3.7 million associated with the acquisition of substantially all of the oilfield services business of ICO and $2.8 million of severance costs resulting from early
termination of employment agreements for several senior executives arising out of the May 2000 merger between Varco and Tuboscope. Excluding these costs, operating profit was $162.6 million.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), effective January 1, 2002.
The effects of not amortizing goodwill and other intangible assets in periods prior to the adoption of SFAS 142 would have resulted in net income of $93.4 million, $29.5 million, $38.2 million, and $110.0 million for the years ended December 31,
2001, 2000, 1999, and 1998, respectively; basic earnings per common share of $.98, $.32, $.42, and $1.21 for the years
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



---

| | ended December 31, 2001, 2000, 1999, and 1998, respectively; and diluted earnings per common share of $.97, $.31, $.41, and $1.18 for the
years ended December 31, 2001, 2000, 1999, and 1998, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | EBITDA means earnings before interest, taxes, depreciation, amortization, and extraordinary items and should not be considered as an alternative to net
income or any other generally accepted accounting principles measure of performance as an indicator of the Companys operating performance or as a measure of liquidity. The Company believes EBITDA is a widely accepted financial indicator of a
companys ability to service debt.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Ratio of EBITDA to interest expense represents an industry ratio that provides an investor with information as to the Companys current ability to meet its
interest costs.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | For the purpose of this calculation, earnings consist of net income (loss) before income taxes, extraordinary items, and fixed charges. Fixed
charges consist of interest expense and amortization of debt discount and related expenses believed by management to be representative of the interest factor thereon.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ITEM  7.    MANAGEMENTS |  | DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
| | ------------------------ |  | ------------------------------------------------------------------------



General



Operating Environment Overview



The Companys results are dependent on the level of worldwide oil and gas drilling, well remediation activity, the prices of oil and
gas, capital spending by other oilfield service companies and drilling contractors, pipeline maintenance activity, and worldwide oil and gas inventory levels. Key industry indicators for the past three years include the following:



|                                                  |  | 2002* |       | 2001* |   | 2000* |  | % 2002 v 2001 |       |  | % 2001 v 2000 |   
|------------------------------------------------- |  | ----- | ----- | ----- | - | ----- |  | ------------- | ----- |  | ------------- | --
|Active Drilling Rigs:                             |  |       |       |       |   |       |  |               |       |  |               |   
|U.S.                                              |  |       | 831   |       |   | 1,155 |  |               | 916   |  | (28.1         | %)
|Canada                                            |  |       | 266   |       |   | 342   |  |               | 353   |  | (22.2         | %)
|International                                     |  |       | 732   |       |   | 745   |  |               | 652   |  | (1.7          | %)
|                                                  |  |       |       |       |   |       |  |               |       |  |               |   
|Worldwide                                         |  |       | 1,829 |       |   | 2,242 |  |               | 1,921 |  | (18.4         | %)
|                                                 
|Active Workover Rigs:                             |  |       |       |       |   |       |  |               |       |  |               |   
|U.S.                                              |  |       | 1,010 |       |   | 1,211 |  |               | 1,056 |  | (16.6         | %)
|Canada                                            |  |       | 261   |       |   | 342   |  |               | 342   |  | (23.7         | %)
|                                                  |  |       |       |       |   |       |  |               |       |  |               |   
|North America                                     |  |       | 1,271 |       |   | 1,553 |  |               | 1,398 |  | (18.2         | %)
|West Texas Intermediate Crude prices (per barrel) |  | $     | 26.13 |       | $ | 25.93 |  | $             | 30.34 |  | 0.8           | % 
|Natural Gas Prices ($/mbtu)                       |  | $     | 3.35  |       | $ | 3.97  |  | $             | 4.32  |  | (15.6         | %)

---

|* |  | Averages for the years indicated. The source for rig activity information was Baker Hughes Incorporated (BHI), and the source for oil and gas prices was
Department of Energy, Energy Information Administration (www.eia.doe.gov).
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The decline in U.S., Canadian, and international rig activity, which began in the fourth quarter of 2001, continued in the first half of 2002 and rig activity remained relatively low throughout 2002
compared to recent years. U.S., Canadian, and international rig activity declined 28.1%, 22.2%, and 1.7% for the full year in 2002 compared to 2001. On a combined basis, worldwide rig activity declined 18.4% in 2002 compared to the prior year
average. In addition, North America workover rig activity was down 18.2% in 2002. However, oil prices rose sharply in the second half 2002, resulting in an average price per barrel of West Texas Intermediate Crude of $26.13, an increase of 0.8% over
the average for 2001. Natural gas prices were down 15.6% in 2002 compared to 2001, but recorded the strongest quarterly average prices in the fourth quarter of 2002 since the second quarter of



31



---

2001. Management believes these contradictory trends of strong commodity prices but weak drilling and workover activity are due to customer
concerns and uncertainty about the recovery of the U.S. and world economy and related demand for energy. Rig activity has remained weak due to questions about the sustainability of future oil and gas prices. In addition, oil prices may be reflecting
a premium due to the risk of supply disruption due to the war in Iraq.



The Companys total revenue was $1,335.1 million in 2002, an increase of $67.3 million (5.3%) over 2001 revenue of $1,267.8 million. The increase was due to a $91.1 million increase in Drilling Equipment revenue related
to several large drilling equipment packages being shipped in 2002 and the estimated incremental impact on revenue (approximately $90.7 million) related to 2001 and 2002 acquisitions. The decline in rig activity had an adverse effect on the
Companys services business revenue in 2002 compared to 2001. Excluding the estimated impact from acquisitions, Tubular Services and Drilling Services revenue was down approximately 11% ($40.2 million) and 13% ($41.6 million) in 2002 compared
to 2001. In addition, the Companys Coiled Tubing and Wireline business was also negatively impacted by the decline as non-acquisition related revenue was down approximately 12% ($23.7 million) in 2002 compared to 2001.



The Company has executed acquisitions over the past few years
as part of its growth strategy. The Company seeks, where possible, to effect consolidation cost savings by integrating acquired businesses with its own. As a consequence, the financial results of acquired businesses may not be separable from the
Companys existing businesses, and therefore may not be readily measurable. Accordingly, the impact of acquisitions on the Companys overall financial results are difficult to measure. Where the Company provides estimates of incremental
revenue and operating profit from acquired businesses, these estimates are based upon managements judgment.



32



---



The following
table details the U.S., Canadian, and international rig activity and West Texas Intermediate Oil prices for the three years ended December 31, 2002 on a quarterly basis:



LOGO



|Source:    Rig |  | count: Baker Hughes, Inc. West Texas Intermediate Crude Price: Department of Energy, Energy Information Administration (www.eia.doe.gov).
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------



U.S. rig activity at February 28, 2003 was at 912 rigs
drilling, an increase of 5.8% from the December 27, 2002 activity of 862 rigs. The Company believes that current industry projections are forecasting U.S. drilling rig activity to continue to be up slightly in the first half of 2003 compared to the
second half of 2002. In addition, 2003 rig activity is expected to be up in both Canada and internationally. Numerous events could significantly alter these projections including the war in Iraq, the acceleration or deceleration of the recovery of
the U.S. and world economies, a build up in world oil inventory levels, or numerous other events or circumstances.



33



---



Results of Operations



Year Ended December 31, 2002 vs Year
Ended December 31, 2001



Revenue.    Revenue for the year ended December 31, 2002 was $1,335.1 million, an increase of $67.3 million, or 5.3%, from revenue of $1,267.8 million for the year ended December 31, 2001. The increase
in revenue was primarily due to acquisitions completed in 2002 and 2001, and the shipment of several large drilling equipment packages in 2002.



The following table summarizes the Companys revenue by operating segment in 2002, 2001, and 2000 (in thousands):



|                                  |  | 2002 |           | 2001 |   | 2000     
|--------------------------------- |  | ---- | --------- | ---- | - | ---------
|Drilling Equipment Sales          |  | $    | 486,695   |      | $ | 395,550  
|Tubular Services                  |  |      | 355,966   |      |   | 352,624  
|Drilling Services                 |  |      | 278,617   |      |   | 314,272  
|Coiled Tubing & Wireline Products |  |      | 213,786   |      |   | 205,363  
|                                  |  |      |           |      |   |          
|Total Revenue                     |  | $    | 1,335,064 |      | $ | 1,267,809
|                                  |  |      |           |      |   |          



Revenue
from the Companys Drilling Equipment Sales in 2002 was $486.7 million, an increase of $91.1 million (23.0%) compared to 2001. The increase was due to the shipment of several major rig projects totaling $99.5 million in 2002 compared to
$44.6 million for major projects in 2001. Due to these major projects and to the shipment of other units, the Company shipped a record number of 75 top drives in 2002 compared to 59 top drives in 2001. In addition, 2002 revenue was up approximately
$9.2 million due to the Companys September 2001 acquisition of Morinoak International Limited Group (MIL), a manufacturer of derricks, substructures and other structural drilling rig components. New orders for 2002 were $453.3 million compared
to $545.9 million for the same period of 2001, while backlog at December 31, 2002 was $218.1 million compared to $251.5 million at December 31, 2001. The decline in orders and backlog was reflective of the lower market activity in 2002 compared to
2001. In accordance with industry practice, orders and commitments generally are cancelable by customers at any time.



Revenue from the Companys Tubular Services was $356.0 million in 2002, an increase of $3.3 million (0.9%) over 2001 results.
Acquisitions for 2002 and 2001 resulted in an estimated incremental increase in revenue of approximately $43.5 million in 2002 compared to 2001. The largest acquisition was ICOs oilfield services business on September 6, 2002. Excluding the
impact from these acquisitions, Tubular Services revenue would have declined $40.2 million (11%) in 2002 compared to 2001. The major reason for the non acquisition decline was lower rig activity in the U.S., which was down 28.1% in 2002 compared to
2001. This resulted in a decrease of $28.0 million (25.3%) in U.S. inspection and coating revenue (excluding the impact from acquisitions). In addition, lower rig activity resulted in a $15.3 million decline in revenue from the Companys
Fiberglass operations in 2002 compared to 2001 (excluding the estimated impact of $7.7 million in revenue from acquisitions).



Revenue from the Companys Drilling Services was $278.6 million in 2002, a decrease of $35.7 million (11%) compared to 2001 results.
Excluding the estimated impact from 2001 acquisitions, revenue would have been down $41.6 million (13%) in 2002. The decline was mainly due to a $10.3 million decline in North America Solids Control revenue and a $24.8 million decline in Latin
America revenue. The decline in North America Solids Control revenue was due to a 26.7% drop in North America rig activity. Lower Latin America revenue was concentrated primarily in Venezuela and Argentina as a result of economic and political
troubles in those countries. In addition, the Companys Instrumentation revenue decreased $12.3 million in 2002 due to the decrease in worldwide drilling activity, primarily in North America.



Coiled Tubing and Wireline Products revenue was $213.8 million
in 2002, an increase of $8.4 million in 2002 compared to 2001. The increase was due to the acquisition of three companies in 2001, which contributed



34



---

estimated incremental revenue of approximately $32.1 million in 2002 compared to 2001. Excluding the estimated impact of these acquisitions,
Coiled Tubing and Wireline Products revenue would have decreased $23.7 million (12%) in 2002 compared to 2001. The lower market activity resulted in lower revenue in the Companys Coiled Tubing related products. Coiled Tubing and Wireline
Products backlog at December 31, 2002 was $49.1 million, a decline of $6.8 million (12%) compared to December 31, 2001 further reflecting the declining market activity in 2002. However, sequentially from the third quarter of 2002, backlog increased
$8.2 million (20%) due to the recent increase in market activity discussed above.



Gross Profit.    Gross profit was $383.0 million (28.7% of revenue) in 2002 compared to $373.5 million (29.5% of revenue) in 2001. The increase in gross profit dollars was
due to no amortization of goodwill in 2002 compared to $10.5 million of goodwill amortization in 2001. The Company applied SFAS 142, the new rule on accounting for goodwill and other intangible assets, in the first quarter of 2002. See Note 2 of
Notes to the Consolidated Financial Statements for further discussion. Excluding the impact of goodwill amortization, gross profit would have been $384.0 million (30.3% of revenue) in 2001. Excluding the impact of goodwill amortization, gross profit
percents declined due to lower revenue from the Companys higher margin services business segments (Tubular Services and Drilling Servicessee discussion above).



Selling, General, and Administrative Costs.    Selling, general, and
administrative costs were $163.4 million in 2002, an increase of $11.1 million (7%) over 2001 costs of $152.3 million. The increase was due primarily to the acquisitions in 2002 and 2001. In addition, the Companys insurance costs and fringe
benefit costs were also greater in 2002 than 2001. As a percent of revenue, selling, general, and administrative costs were 12.2% of revenue in 2002 compared to 12.0 % of revenue in 2001.



Research and Engineering Costs.    Research and engineering costs were $57.1
million in 2002, an increase of $10.4 million (22%) compared to 2001 results. The increase was primarily due to greater costs in the Drilling Equipment Sales group and the acquisitions completed in 2002 and 2001.



Merger, Transaction, and Litigation
Costs.    Merger, transaction, and litigation costs were $6.5 million and $16.5 million for December 31, 2002 and 2001, respectively. The 2002 costs consisted of two components; $3.7 million of transaction costs
associated with the acquisition of substantially all of the oilfield services business of ICO (see Note 3 of Notes to Unaudited Consolidated Financial Statements) and $2.8 million of severance costs resulting from early termination of employment
agreements for several senior executives arising out of the May 2000 merger between Varco and Tuboscope. During the second quarter of 2001, the Company engaged in a court ordered mediation and as a result recorded a $16.5 million charge concerning a
patent litigation matter, which has been settled.



Operating Profit.    Operating profit was $156.1 million for 2002 compared to $158.1 million for 2001. Excluding merger, transaction, and litigation costs, operating profit was $162.6 million (12.2% of
revenue) for 2002 compared to $174.6 million (13.8% of revenue) for 2001. The decrease in operating profit and margin was due to an unfavorable product mix and generally weaker oil and gas market conditions, in 2002 compared to 2001 as discussed in
detail above.



Interest
Expense.    Interest expense was $25.6 million in 2002 compared to $21.8 million in 2001. The increase in interest expense was due to greater average outstanding debt balances as a result of the $200.0 million Senior Notes
issued in May 2001 and the $150.0 million Senior Notes issued in November 2002.



Other Expense (Income).    Other expense includes interest income, foreign exchange losses and gains, and other expense (income). Net other expense was $7.7 million in 2002
compared to $4.3 million in 2001. The increase in other expense in 2002 was primarily due to greater foreign exchange losses. The losses occurred in the third quarter of 2002 due mostly to foreign exchange losses in Venezuela, the second quarter of
2002 due mostly to the weakening of the U.S. dollar against the euro dollar and UK pound sterling, and the first quarter 2002 due mostly to foreign exchange losses in Argentina as a result of the devaluation of the Argentina peso in the first
quarter of 2002.



35



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Provision
for Income Taxes.    The Company recorded a tax provision of $43.0 million (35.0% of pre-tax income) and $49.1 million (37.2% of pre-tax income) for the years ended December 31, 2002 and 2001, respectively. The 2001 tax
provision was higher than the domestic tax rate of 35% due to deductions not allowed under domestic and foreign jurisdictions related to merger and transaction costs, and goodwill amortization and to foreign earnings subject to tax rates differing
from domestic rates.



Net
Income.    Net income was $79.8 million and $83.0 million for 2002 and 2001, respectively. The decrease in net income was due to the factors discussed above.



Year Ended December 31, 2001 vs Year Ended December 31, 2000



Revenue.    Revenue for the year
ended December 31, 2001 was $1,267.8 million, an increase of $401.2 million, or 46.3%, from revenue of $866.6 million for the year December 31, 2000. There were three main factors related to the increase in revenue: the worldwide increase in
rig activity (especially in the U.S.); 15 acquisitions completed in 2001 and two acquisitions completed in December 2000; and the 2001 shipment of several large drilling equipment orders which were originally ordered in 2000. U.S. Inspection,
Coating, and Solids Control revenue was up $38.6 million in 2001 primarily as a result of the 26% increase in U.S. rig activity in 2001 over 2000 discussed above. Management believes that acquisitions completed in 2001 and December 2000
contributed approximately $162.2 million of the increase. In addition, the shipment of approximately $44.6 million of major product shipment in 2001 contributed further to the increase. Additional increases are discussed in further detail below
by product line.



Revenue from the Companys
Drilling Equipment Sales in 2001 was $395.6 million, an increase of $112.2 million (39.6%) compared to 2000. This increase was due primarily to the 2001 shipment of several large orders placed in 2000. The 2001 results included $27.9 million of
revenue related to the projects for Maersk (Hyundai Heavy Industries). In addition, 2001 results included a record year for shipment of top drive systems, as 59 were shipped. New orders for 2001 were $545.9 million, an increase of $230.2 million
(72.9%) over 2000. Backlog at December 31, 2001 for the Drilling Equipment Sales group was $251.5 million, an increase of 185.5% over December 31, 2000 backlog of $88.1 million. The increase in orders and backlog was due to an increase in 2001
drilling activity, the receipt of several large rig orders, and a record number of orders for top drive systems. However, backlog at December 31, 2001 was actually down from backlog at September 30, 2001 of $274.3 million (8.3%). The recent decline
in backlog was reflective of the declining market activity in the fourth quarter of 2001. In accordance with industry practice, orders and commitments generally are cancellable by customers at any time.



Revenue from the Companys Tubular Services was $352.6
million in 2001, an increase of $104.5 million (42.1%) over 2000 results. U.S. inspection and coating revenue increased $25.4 million (30%) over 2000 results due to increased U.S. rig activity. Also, the Companys Eastern Hemisphere inspection
and coating revenue increased by $13.7 million due to the increase in international activity. In addition, this segments fiberglass tubular operations revenue was up $59.7 million due to greater activity levels and the impact of acquisitions
completed late in 2000 and in July of 2001. Revenue from the Companys pipeline inspection operation increased by $6.7 million due to greater demand for pipeline inspection in the U.S.



Drilling Services revenue was $314.3 million in 2001, an
increase of $64.0 million (25.6%) over 2000 results. U.S. Solids Control revenue increased $13.2 million (43%) in 2001 compared to 2000 due to a strong U.S. market. In addition, the Company benefited from strong markets and revenue growth in Latin
America (up $10.4 million) and the Eastern Hemisphere (up $33.8 million). Also, the Companys instrumentation business increased $20.4 primarily due to two acquisitions in Canada in 2001.



Coiled Tubing and Wireline Products revenue was $205.4 million
in 2001, an increase of $120.4 million (141.8%) over 2000 results. The increase was mainly due to the 2001 acquisitions of four Coiled Tubing and Wireline Products companies and greater sales of coiled tubing units and pressure control equipment.
The 2001 acquisitions included Quality Tubing (January 2001), Bradon Industries Ltd. (March 2001), Albins Enterprises, Inc. (May 2001), and Elmar Services Ltd. (August 2001). Management estimates that these four acquisitions



36



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contributed approximately $74.0 million of revenue in 2001 with Quality Tubing contributing approximately $42.8 million of revenue in 2001.
The remaining $46.4 million increase was due primarily to greater sales of coiled tubing units and pressure control equipment in 2001 compared to 2000. Backlog for this segment was at $55.9 million at December 31, 2001 compared to $61.2 million at
December 31, 2000, a decline of 8.7% and an additional indication of the recent decline in the market.



Gross Profit.    Gross profit was $373.5 million (29.5% of revenue) in 2001 compared to $239.6 million (27.6%
of revenue) in 2000. The increase in gross profit dollars was due to the greater revenue in 2001 discussed above. The increase in gross profit percentages was due to strong operating leverage in Tubular Services, Drilling Services, and Coiled Tubing
and Wireline Products. These strong operating leverages more than offset lower margins from the Drilling Equipment Sales group which was caused by higher engineering costs on certain large sales of drilling equipment units in 2001.



Selling, General, and Administrative
Costs.    Selling, general, and administrative costs were $152.3 million in 2001, an increase of $32.3 million (27%) over 2000 costs of $119.9 million. Approximately $16.6 million of the increase was due to the 15
acquisitions completed in 2001 and two acquisitions in December 2000. The remaining $15.7 million increase was due primarily to the non-acquisition related growth in revenue in 2001 over 2000. As a percent of revenue, selling, general, and
administrative costs were 12.0% of revenue in 2001 compared to 13.8% of revenue in 2000.



Research and Engineering Costs.    Research and engineering costs was $46.6 million in 2001, an increase of $14.5 million (45%) compared to 2000 results. Management estimates
that the 15 acquisitions completed in 2001 and two acquisitions completed in December 2000 represented $1.2 million of the increase. The majority of the remaining increase was due primarily to greater costs in the Drilling Equipment Sales group.



Merger, Transaction, and Litigation
Costs.    Merger, transaction, and litigation costs were $16.5 million and $26.6 million for the years ended December 31, 2001 and 2000, respectively. During the second quarter of 2001, the Company engaged in a court ordered
mediation and as a result recorded a $16.5 million charge concerning a patent litigation matter, which has subsequently been settled. The 2000 merger and transaction costs included financial advisor fees, full vesting of executive stock matching
awards and employment retirement benefits, equipment rationalization write-offs, certain costs related to employment contracts, legal, accounting, and printing costs associated with the Merger.



Operating Profit.    Operating
profit was $158.1 million for 2001 compared to $60.9 million for 2000. Excluding merger, transaction, and litigation costs, operating profit as a percentage of revenue was 13.8% in 2001 compared to 10.1% in 2000. The improvement in both operating
profit dollars and percentages was due to greater revenue and a favorable product mix in 2001 compared to 2000.



Interest Expense.    Interest expense was $21.8 million in 2001 compared to $15.3 million in 2000. The increase
in interest expense was due to greater average outstanding debt balances as a result of the $200.0 million Senior Notes issued in the second quarter of 2001.



Other Expense (Income).    Other expense includes interest income, foreign exchange losses and gains, and other
expense (income). Net other expense was $4.3 million in 2001 compared to other income of $0.2 million in 2000. The increase in other expense was due mainly to the permanent impairment of an investment and lower interest income related to less excess
cash on hand in 2001 than 2000.



Provision for
Income Taxes.    The Company recorded a tax provision of $49.1 million (37.2% of pre-tax income) and $24.8 million (54.1% of pre-tax income) for the years ended December 31, 2001 and 2000, respectively. These tax provisions
were higher than the domestic tax rate of 35%, due to deductions not allowed under domestic and foreign jurisdictions related to merger and transaction costs, and goodwill amortization and to foreign earnings subject to tax rates differing from
domestic rates.



Net
Income.    Net income was $83.0 million and $21.1 million for 2001 and 2000, respectively. The increase in net income was due to the factors discussed above.



37



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Financial Condition and
Liquidity



At December 31, 2002, the Company
had cash and cash equivalents of $106.0 million, and total debt of $467.9 million. At December 31, 2001 cash and cash equivalents were $57.5 million, and total debt was $322.6 million. The increase in total debt in 2002 was primarily associated
with the acquisition of the ICO oilfield services business for approximately $137.6 million. The Companys outstanding debt at December 31, 2002 consisted of $201.4 million of 71⁄4% Senior Notes due 2011, $149.2 million of 5 1⁄2% Senior
Notes due 2012, $99.3 million of 7 1⁄2% Senior Notes due 2008, and other debt of $18.0 million.



For the fiscal year ended December 31, 2002, cash provided by operating activities was $102.8 million compared to $84.0 million for 2001.
Cash was provided by operations primarily through net income of $79.8 million plus non-cash charges of $76.5 million. In addition, cash was provided by a decrease in accounts receivable of $35.4 million and prepaid expenses of $3.2 million.
These items were offset by an increase in inventory of $54.0 million, a decrease in accounts payable and accrued liabilities of $23.0 million and a decrease in income taxes payable of $16.0 million. The decrease in accounts receivable was due to an
improvement in the collection of outstanding receivables as days sales outstanding declined from 86.9 days at December 31, 2001 to 84.1 days at December 31, 2002. In addition, fourth quarter 2001 revenue was $362.2 million compared to $354.0 million
in the fourth quarter of 2002. The increase in inventory was primarily in the Drilling Equipment operations and was related to a management decision to maintain greater stock inventory levels of spare parts inventory for Drilling Equipment customers
in order to reduce cycle times. The decrease in accounts payable and accrued liabilities was due to lower customer deposits at December 31, 2002 than December 31, 2001 and lower payables associated with services operations in the fourth quarter of
2002 compared to the fourth quarter of 2001. The decrease in income taxes payable was due to less pre-tax income in the fourth quarter of 2002 than the fourth quarter of 2001, and 2002 cash tax payments.



For the fiscal year ended December 31, 2002, cash used for
investing activities was $202.3 million compared to $211.1 for the same period of 2001. The Company used approximately $152.4 million of cash for seven acquisitions during 2002. See Note 3 of Notes to the Consolidated Financial Statements. Capital
spending of $49.4 million was primarily related to rental equipment for the Companys Solids Control operations and Top Drive businesses, and the construction of a coating plant in the Far East.



For the fiscal year ended December 31, 2002, the Company
generated $148.4 million of cash from financing activities compared to cash generated from financing activities in 2001 of $173.1 million. Cash generated consisted of net borrowings of $139.2 million (primarily from the issuance of $150.0 million of
Senior Notes described in Note 8 to Notes to the Financial Statements) and proceeds from the sale of stock of $9.5 million.



On January 30, 2002 the Company entered into a new credit agreement with a syndicate of banks that provided up to $125.0 million of funds
under a revolving credit facility and $5 million under a bilateral letter of credit facility with a separate bank. The agreement was amended on September 5, 2002 with the available revolving funds increased to $150.0 million. The facility expires on
January 30, 2005. The facility is secured by guarantees of material U.S. subsidiaries. The interest rate on the borrowed portion of the revolver is based on the Companys rating by S&P and Moodys, which at the time of the agreement
resulted in an interest rate of Libor + 0.625% or the prime rate. Commitment fees range from 0.1% to 0.25% depending on the Company rating. At December 31, 2002, there was $146.9 million of funds available under the revolving credit facility and
$3.7 million of funds available under the bilateral letter of credit facility, with $3.1 million and $1.3 million being used for letters of credit, respectively.



The Company believes that its December 31, 2002 cash and cash equivalents, its outstanding credit facility,
and cash flow from operations will be sufficient to meet its capital expenditures and its operating cash needs for the foreseeable future.



38



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A summary of
the Companys outstanding contractual obligations at December 31, 2002 is as follows (in thousands):



|                              |  |       |         | Payments Due by Period
|----------------------------- |  | ----- | ------- | ----------------------
|                              |  | Total |         | Less than 1 Year      
|Total Debt                    |  | $     | 467,928 |                       
|Operating Leases              |  |       | 87,799  |                       
|                              |  |       |         |                       
|Total contractual obligations |  | $     | 555,727 |                       
|                              |  |       |         |                       
|Standby Letters of Credit     |  | $     | 22,877  |                       
|                              |  |       |         |                       



Critical Accounting
Policies and Estimates



In preparing the
financial statements, we make assumptions, estimates and judgments that affect the amounts reported. We periodically evaluate our estimates and judgments related to bad debts and inventory obsolescence; impairments of long-lived assets, including
goodwill and our reserves for product warranty claims. Note 2 to the consolidated financial statements contains the accounting policies governing each of these matters. Our estimates are based on historical experience and on our future expectations
that we believe are reasonable; the combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results are likely to differ from our
current estimates and those differences may be material.



Reserves for bad debts are determined on a specific identification basis when we believe that the required payment of specific amounts owed to us is not probable. A substantial portion of the Companys revenues come from
international oil companies, international oilfield service companies, and government-owned or government-controlled oil companies. Therefore, the Company has significant receivables in many foreign jurisdictions. If worldwide oil and gas drilling
activity or changes in economic conditions in foreign jurisdictions deteriorate, our customers may be unable to repay these receivables, and additional allowances could be required.



Reserves for inventory obsolescence are determined based on our historical usage of inventory on-hand as well
as our future expectations related to requirements to provide spare parts for our substantial installed base and new products. Changes in worldwide oil and gas drilling activity and the development of new technologies associated with the drilling
industry could require the Company to record additional allowances to reduce the value of inventory to the lower of its cost or net realizable value.



Accruals for warranty claims are provided based on historical experience at the time of sale. Product warranties generally cover periods
from one to three years. Our accruals for warranty claims are affected by the size of our installed base of products currently under warranty, as well as new products delivered to the market. If actual experience proves different from historical
estimates, changes to the Companys provision rates may be required.



Long-lived assets, which include property and equipment, goodwill, and identified intangible assets comprise a significant amount of the Companys total assets. The Company makes judgments and estimates in conjunction
with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and useful lives. Additionally, the carrying values of these assets are reviewed for impairment periodically or whenever events or
changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. This requires the Company to make long-term
forecasts of its future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for the Companys products and services, future market conditions and technological developments. Significant
and unanticipated changes to these assumptions or the intended use of these assets could require a provision for impairment in a future period.



39



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Factors Affecting Future
Operating Results



This Annual Report
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The forward looking statements are those that do not state historical facts and are
inherently subject to risk and uncertainties. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those projected in
the forward-looking statements. Such risks and uncertainties are set forth below.



The oil and gas industry in which the Company participates historically has experienced significant volatility. Demand for the Companys services and products depends primarily upon the number of
oil and gas wells being drilled, the depth and drilling conditions of such wells, the volume of production, the number of well completions, the capital expenditures of other oilfield service companies and drilling contractors, the level of pipeline
construction and maintenance expenditures, and the level of workover activity. Drilling and workover activity can fluctuate significantly in a short period of time, particularly in the United States and Canada.



The willingness of oil and gas operators to make capital
expenditures for the exploration and production of oil and natural gas will continue to be influenced by numerous factors over which the Company has no control, including the prevailing and expected market prices for oil and natural gas. Such prices
are impacted by, among other factors, the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to maintain price stability through voluntary production limits, the level of production of non-OPEC countries,
worldwide demand for oil and gas, general economic and political conditions, costs of exploration and production, availability of new leases and concessions, and governmental regulations regarding, among other things, environmental protection,
taxation, price controls and product allocations. In addition, the war in Iraq may have an impact on market prices for oil and natural gas. No assurance can be given as to the level of future oil and gas industry activity or demand for the
Companys services and products.



The
Companys foreign operations, which include significant operations in Canada, Europe, the Far East, the Middle East and Latin America, are subject to the risks normally associated with conducting business in foreign countries, including
uncertain political and economic environments, which may limit or disrupt markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property without fair compensation. Government-owned petroleum
companies located in some of the countries in which the Company operates have adopted policies (or are subject to governmental policies) giving preference to the purchase of goods and services from companies that are majority-owned by local
nationals. As a result of such policies, the Company relies on joint ventures, license arrangements and other business combinations with local nationals in these countries. In addition, political considerations may disrupt the commercial
relationship between the Company and such government-owned petroleum companies. Although the Company has from time to time experienced problems arising from political instability, nationalistic policies, economic instability or currency
restrictions, such problems have not been material to the Companys financial results. However, there can be no assurances that such problems will not be material in the future, including as a result of the war in Iraq and political instability
in Venezuela.



The Companys solids control,
inspection and coating services routinely involve the handling of waste materials, some of which may be considered to be hazardous wastes. The Company is subject to numerous local, state and federal laws and regulations concerning the containment
and disposal of materials, pursuant to which the Company has been required to incur compliance and clean-up costs, which were not substantial in 2002, 2001, and 2000. Compliance with environmental laws and regulations due to currently unknown
circumstances or developments, however, could result in substantial costs and have a material adverse effect on the Companys results of operations and financial condition.



A significant portion of the Companys recent growth in revenues and profitability has been the result
of its aggressive acquisition program. The Companys future operating results will be impacted by the Companys ability to identify additional attractive acquisition opportunities, consummate such acquisitions on favorable terms and
successfully integrate the operations of the acquired businesses with those of the Company.





40



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ITEM 7A.    QUANTITATIVE & QUALITATIVE DISCLOSURE ABOUT MARKET RISK



The Company does not believe it has a
material exposure to capital market risk. The Company has historically managed its exposure to interest changes by using a combination of fixed rate debt, variable rate debt, and, occasionally, interest rate swap and collar agreements in its total
debt portfolio. As of December 31, 2002, the Company had no interest rate swap or collar agreements outstanding. At December 31, 2002, the Company had $467.9 million of outstanding debt. Fixed rate debt included $201.4 million of Senior Notes at a
fixed rate of 71/4%, $149.2 million of Senior Notes at a fixed interest rate of 51/2%, and $99.3 million of Senior Notes at a fixed interest rate of 71/2%. With respect to foreign currency fluctuations, the Company primarily uses natural hedges to minimize the effect of rate fluctuations. When natural
hedges are not sufficient, generally it is the Companys policy to enter into forward foreign exchange contracts to hedge significant transactions for periods consistent with the underlying risk. The Company had no forward foreign exchange
contracts outstanding at December 31, 2002. The Company does not enter into foreign currency or interest rate transactions for speculative purposes.



Because the Company operates in virtually every oil and gas exploration and production region in the world,
it conducts a portion of its business in currencies other than the U.S. dollar. The functional currency for some of the Companys international operations is the applicable local currency. Although some of the Companys international
revenues are denominated in the local currency, the effects of foreign currency fluctuations are partly mitigated because local expenses of such foreign operations are also generally denominated in the same currency. During the years ended December
31, 2002, 2001, and 2000 the Company reported foreign currency losses (gains) of $5,201,000, ($71,000), and $1,134,000, respectively. The losses were primarily due to exchange rate fluctuations related to receivable and payable balances denominated
in currencies other than the functional currency.



Assets and liabilities of those foreign subsidiaries are translated using the exchange rates in effect at the balance sheet date, resulting in translation adjustments that are reflected in accumulated other comprehensive loss in the
common stockholders equity section of the Companys balance sheet. The Company recorded currency translation losses of $840,000, $2,094,000, and $6,311,000 during the years ended December 31, 2002, 2001, and 2000 related to these
translations.



ITEM 8.    FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA



The
financial statements of the Company and subsidiaries required to be included in this Item 8 are set forth in Item 15 of this Report.



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



None.



41



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PART III



ITEM 10.    DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT



There is hereby
incorporated herein by reference the information appearing under the captions Proposal 1Election of Directors, Executive Officers and Compliance with Section 16(a) of the Securities Exchange Act of 1934
of the registrants definitive Proxy Statement for its 2003 Annual Meeting to be filed with the Securities and Exchange Commission (the Commission) on or before April 30, 2003.



ITEM 11.    EXECUTIVE COMPENSATION



There is hereby incorporated herein by reference the
information appearing under the caption Executive Compensation of the registrants definitive Proxy Statement for its 2003 Annual Meeting to be filed with the Commission on or before April 30, 2003.



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT



There is hereby
incorporated herein by reference the information appearing under the caption Security Ownership of Certain Beneficial Owners and Management of the registrants definitive Proxy Statement for its 2003 Annual Meeting to be filed with
the Commission on or before April 30, 2003.



ITEM
13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



There is hereby incorporated herein by reference the information appearing under the caption Commission Committee Interlocks and Insider Participation of the registrants definitive
Proxy Statement for its 2003 Annual Meeting to be filed with the Commission on or before April 30, 2003.



ITEM 14.    CONTROLS and PROCEDURES



(a)  Evaluation of disclosure controls and procedures



Our chief executive officer and chief financial officer, based on their evaluation of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a14(c)) as of a date within 90 days prior to the filing of this annual report on Form 10-K, have concluded that our disclosure controls and procedures are adequate and
effective for the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, and that this information is recorded, processed, summarized and reported within the time periods specified in
the Commissions rules and forms.



(b)  Changes in internal control



There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their evaluation described above.



42



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PART IV



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



(a)(1)  Financial Statements of the Company



|                                                                                                                                       |  | Page    
|-------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|Report of Independent Auditors                                                                                                         |  | F-1     
|Consolidated Balance Sheets at December 31, 2002 and 2001                                                                              |  | F-2     
|Consolidated Statements of Income for the years ended December 31, 2002, 2001, and
2000                                                |  | F-3     
|Consolidated Statements of Common Stockholders Equity and Comprehensive Income for
the years ended December 31, 2002, 2001, and 2000, |  | F-4     
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and
2000                                            |  | F-5     
|Notes to Consolidated Financial Statements                                                                                             |  | F-6F-30



(2)  Financial Statement Schedules:



The information under the following captions is filed as part of this Report:



|Schedule I Parent Company Only Condensed Balance Sheets                |  | S-1
|---------------------------------------------------------------------- |  | ---
|Schedule I Parent Company Only Condensed Statements of Income          |  | S-2
|Schedule I Parent Company Only Condensed Statements of Cash Flows      |  | S-3
|Schedule I Parent Company Only Notes to Condensed Financial Statements |  | S-4
|Schedule II Valuation and Qualifying Accounts                          |  | S-5



All
other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted or the information is
presented in the consolidated financial statements or related notes.



(3)  The list of exhibits contained in the Index to Exhibits are filed as part of this ReportPage 44.



(b)  Reports on Form 8-K



On November 13, 2002, the Company filed a Form 8-K Current Report reporting certain changes in its senior
management.



On November 15, 2002, the Company
filed a Form 8-K Current Report reporting that it had priced a private placement of $150 million 5.5% Senior Notes due 2012.



43



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EXHIBIT INDEX



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                         |  | Note No. 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|           
|3.1         |  | Third Amended and Restated Certificate of Incorporation of Varco International, Inc.,
dated May 30, 2000.                                                                                                                                                                                                                                                                                                           |  | (Note 1) 
|           
|3.2         |  | Third Amended and Restated Bylaws.                                                                                                                                                                                                                                                                                                                                                                                  |  | (Note 1) 
|           
|3.3         |  | Certificate of Designations of Series A Junior Participating Preferred Stock of Varco
International, Inc., dated November 30, 2000.                                                                                                                                                                                                                                                                                 |  | (Note 1) 
|           
|4.1         |  | Rights Agreement, dated as of November 29, 2000, by and between the Company and Chase
Mellon Shareholder Services, L.L.C., as Rights Agent, which includes the form of Certificate of Designations of the Series A Junior Participating Preferred Stock of Varco International, Inc. as Exhibit A, the form of Right Certificate as Exhibit B,
and the Summary of Rights to Purchase Preferred Shares as Exhibit C. |  | (Note 1) 
|           
|4.2         |  | Purchase Agreement dated as of October 1, 1991 between the Company and Baker Hughes
Incorporated regarding certain registration rights.                                                                                                                                                                                                                                                                             |  | (Note 2) 
|           
|4.3         |  | Registration Rights Agreement dated April 24, 1996 among the Company, SCF III, L.P.,
D.O.S. Partners L.P., Panmell (Holdings), Ltd. and Zink Industries Limited.                                                                                                                                                                                                                                                    |  | (Note 3) 
|           
|4.4         |  | Registration Rights Agreement dated March 7, 1997 among the Company and certain
stockholders of Fiber Glass Systems, Inc.                                                                                                                                                                                                                                                                                           |  | (Note 4) 
|           
|4.5         |  | Indenture, dated as of February 25, 1998, between the Company, the Guarantors named
therein and The Bank of New York as trustee, relating to $100,000,000 aggregate principal amount of 71⁄2% Senior Notes due 2008; Specimen Certificate of 71⁄2% Senior Notes due 2008 (private notes); and Specimen Certificate at 71⁄2% Senior
Notes due 2008 (public notes).                                                         |  | (Note 5) 
|           
|4.6         |  | Indenture, dated as of May 1, 2001, among the Company, the Guarantors named therein and
The Bank of New York as trustee, relating to $200,000,000 aggregate principal amount of 71⁄4% Senior Notes due 2011; Specimen Certificate of 71⁄4% Senior Notes due 2011 (private notes); and Specimen Certificate of 71⁄4% Senior Notes due
2011 (public notes).                                                                 |  | (Note 6) 
|           
|4.7         |  | Indenture, dated as of November 19, 2002, between the Company, the guarantors named
therein and The Bank of New York Trust Company of Florida as trustee, relating to $150,000,000 aggregate principal amount of 5.5% Senior Notes due 2012 (private notes) Specimen Certificate of 5.5% Senior Notes due 2012 (private notes); and Specimen
Certificate of 5.5% Senior Notes due 2012 (public notes).              |  | (Note 7) 
|           
|4.8         |  | Registration Rights Agreement dated as of November 19, 2002, among the Company and
Salomon Smith Barney Inc.                                                                                                                                                                                                                                                                                                        |  | (Note 7) 
|           
|10.1        |  | Credit Agreement, dated as of January 30, 2002, among the Company, as the Borrower,
Wells Fargo Bank Texas, National Association, as Administrative Agent, Bank One, NA, as Syndication Agent, Credit Suisse First Boston, Cayman Islands Branch, as Documentation Agent, and the other Banks a party thereto.                                                                                                      |  | (Note 8) 
|           
|10.2*       |  | Varco International, Inc. Deferred Compensation Plan (effective January 1,
2003)                                                                                                                                                                                                                                                                                                                                    |  |          
|           
|10.3*       |  | Amended and Restated 1996 Equity Participation Plan.                                                                                                                                                                                                                                                                                                                                                                |  | (Note 1) 
|           
|10.3.1*     |  | Form of Non-qualified Stock Option Agreement for Employees and Consultants; Form of
Non-qualified Stock Option Agreement for Independent Directors.                                                                                                                                                                                                                                                                 |  | (Note 22)



44



---



|Exhibit No. |  | Description                                                                                                                                                                                                        |  | Note No. 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------
|10.4*       |  | Amended and Restated Stock Option Plan for Key Employees of Tuboscope Vetco
International Corporation; Form of Revised Incentive Stock Option Agreement; and Form of Revised Non-Qualified Stock Option Agreement. |  | (Note 9) 
|           
|10.5*       |  | Stock Option Plan for Non-Employee Directors; Amendment to Stock Option Plan for
Non-Employee Directors; and Form of Stock Option Agreement.                                                                       |  | (Note 10)
|           
|10.6*       |  | Amendment and Restatement of the Varco International, Inc. Supplemental Executive
Retirement Plan (effective as of November 15, 2001)                                                                              |  |          
|           
|10.7        |  | Lease dated March 7, 1975, as amended                                                                                                                                                                              |  | (Note 11)
|           
|10.7.1      |  | Agreement dated as of January 1, 1982, with respect to Lease included as Exhibit
10.8                                                                                                                              |  | (Note 12)
|           
|10.7.2      |  | Agreement dated as of January 1, 1984, with respect to Lease included as Exhibit
10.8                                                                                                                              |  | (Note 13)
|           
|10.7.3      |  | Agreement dated as of February 8, 1985, with respect to Lease included as Exhibit
10.8                                                                                                                             |  | (Note 13)
|           
|10.7.4      |  | Agreement dated as of April 12, 1985, with respect to Lease included as Exhibit
10.8                                                                                                                               |  | (Note 14)
|           
|10.7.5      |  | Amendment dated as of January 11, 1996, with respect to Lease included as
Exhibit 10.8                                                                                                                             |  | (Note 15)
|           
|10.8        |  | Standard Industrial Lease-Net dated September 29, 1988 for the premises at
743 N. Eckhoff, Orange, California                                                                                                      |  | (Note 16)
|           
|10.8.1      |  | First amendment dated as of January 11, 1996 to Lease included as Exhibit
10.9                                                                                                                                     |  | (Note 15)
|           
|10.9*       |  | The Varco International, Inc. 1990 Stock Option Plan, as amended                                                                                                                                                   |  | (Note 17)
|           
|10.9.1*     |  | Amendments to the Varco International, Inc. 1990 Stock Option Plan                                                                                                                                                 |  | (Note 18)
|           
|10.10*      |  | Varco International, Inc. 1994 Directors Stock Option Plan                                                                                                                                                        |  | (Note 15)
|           
|10.10.1*    |  | Amendment to Varco International, Inc. 1994 Directors Stock Option
Plan                                                                                                                                           |  | (Note 19)
|           
|10.11*      |  | Amendment and Restatement of the Varco International, Inc. Executive Retiree Medical
Plan (effective as of November 15, 2001)                                                                                      |  |          
|           
|10.12       |  | Master Leasing Agreement, dated December 18, 1995 between the Company and Heller
Financial Leasing, Inc.                                                                                                           |  | (Note 20)
|           
|10.13*      |  | Form of Executive Agreement of certain members of senior management                                                                                                                                                |  | (Note 21)
|           
|10.13.1*    |  | Form of First Amendment to Executive Agreements                                                                                                                                                                    |  | (Note 21)
|           
|10.14*      |  | Executive Agreement of John F. Lauletta                                                                                                                                                                            |  | (Note 21)
|           
|10.15*      |  | Executive Agreement of Joseph C. Winkler                                                                                                                                                                           |  | (Note 21)
|           
|10.16*      |  | Agreement with George Boyadjieff dated November 29, 2002                                                                                                                                                           |  |          
|           
|10.17*      |  | Form of Indemnity Agreement                                                                                                                                                                                        |  | (Note 21)
|           
|12.1        |  | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                  |  |          
|           
|21          |  | Subsidiaries                                                                                                                                                                                                       |  |          
|           
|23          |  | Consent of Ernst & Young, LLP.                                                                                                                                                                                     |  |          

---

For purposes of this list of exhibits
and the notes below, the term Company refers to the registrant, Varco International, Inc., a Delaware corporation formerly known as Tuboscope Inc., and the term Varco refers to Varco International, Inc., a California
corporation which merged with and into the registrant in June 2000.



|(*) |  | Management contract, compensation plan or arrangement.
|--- |  | ------------------------------------------------------



45



---



Table of
Contents



|Note 1  |  | Incorporated by reference to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.                           
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|        |  |                                                                                                                                              
|Note 2  |  | Incorporated by reference to the Companys Registration Statement on Form S-1
(No. 33-43525).                                                
|        |  |                                                                                                                                              
|Note 3  |  | Incorporated by reference to the Companys Current Report on Form 8-K filed on
January 16, 1996.                                             
|        |  |                                                                                                                                              
|Note 4  |  | Incorporated by reference to the Companys Current Report on 8-K Filed on March
19, 1997, as amended by Amendment No. 1 filed on May 7, 1997.
|        |  |                                                                                                                                              
|Note 5  |  | Incorporated by reference to the Companys Registration Statement on Form S-4
(No. 333-51115).                                               
|        |  |                                                                                                                                              
|Note 6  |  | Incorporated by reference to the Companys Registration Statement on Form S-4
(No. 333-64226).                                               
|        |  |                                                                                                                                              
|Note 7  |  | Incorporated by reference to the Companys Registration Statement on Form S-4
(No. 333-102162).                                              
|        |  |                                                                                                                                              
|Note 8  |  | Incorporated by reference to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.                           
|        |  |                                                                                                                                              
|Note 9  |  | Incorporated by reference to the Companys Registration Statement on Form S-8
(No. 33-72150).                                                
|        |  |                                                                                                                                              
|Note 10 |  | Incorporated by reference to the Companys Registration Statement on Form S-8
(No. 33-72072).                                                
|        |  |                                                                                                                                              
|Note 11 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the year
ended December 31, 1981.                                        
|        |  |                                                                                                                                              
|Note 12 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the fiscal
year ended December 31, 1982.                                 
|        |  |                                                                                                                                              
|Note 13 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the fiscal
year ended December 31, 1984.                                 
|        |  |                                                                                                                                              
|Note 14 |  | Incorporated by reference to Varcos Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1985.                               
|        |  |                                                                                                                                              
|Note 15 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.                                 
|        |  |                                                                                                                                              
|Note 16 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the fiscal
year ended December 31, 1988.                                 
|        |  |                                                                                                                                              
|Note 17 |  | Incorporated by reference to Varcos Registration Statement on Form S-8,
Registration No. 333-21681.                                         
|        |  |                                                                                                                                              
|Note 18 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the year
ended December 31, 1999.                                        
|        |  |                                                                                                                                              
|Note 19 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.                                 
|        |  |                                                                                                                                              
|Note 20 |  | Incorporated by reference to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.                           
|        |  |                                                                                                                                              
|Note 21 |  | Incorporated by reference to the Companys Registration Statement of Form S-4
(333-34582).                                                   
|        |  |                                                                                                                                              
|Note 22 |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2002.                    



46



---



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.



| |  |                       |  | VARCO INTERNATIONAL, INC.
| |  | --------------------- |  | -------------------------
|
| |  | Dated: March 28, 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 and on the dates indicated.



|Signature                                    |  | Title                                           |  | Date          
|-------------------------------------------- |  | ----------------------------------------------- |  | --------------
|                                             |  |                                                 |  |               
|/S/ GEORGE I. BOYADJIEFFGeorge I. Boyadjieff |  | Chairman of the Board                           |  | March 28, 2003
|                                             |  |                                                 |  |               
|/S/ JOHN F. LAULETTAJohn F. Lauletta         |  | Director, Chief Executive Officer and President |  | March 28, 2003
|                                             |  |                                                 |  |               
|/S/ CLAY C. WILLIAMSClay C. Williams         |  | Vice President and Chief Financial Officer      |  | March 28, 2003
|                                             |  |                                                 |  |               
|/S/ ROBERT W. BLANCHARDRobert W. Blanchard   |  | Principal Accounting Officer                    |  | March 28, 2003
|                                             |  |                                                 |  |               
|/S/ GEORGE S. DOTSON                         |  | Director                                        |  | March 28, 2003
|George S. Dotson                             |  |                                                 |  |               
|                                             |  |                                                 |  |               
|/S/ ANDRE R. HORN                            |  | Director                                        |  | March 28, 2003
|Andre R. Horn                                |  |                                                 |  |               
|                                             |  |                                                 |  |               
|/S/ RICHARD A. KERTSON                       |  | Director                                        |  | March 28, 2003
|Richard A. Kertson                           |  |                                                 |  |               
|                                             |  |                                                 |  |               
|/S/ ERIC L. MATTSON                          |  | Director                                        |  | March 28, 2003
|Eric L. Mattson                              |  |                                                 |  |               
|                                             |  |                                                 |  |               
|/S/ L. E. SIMMONS                            |  | Director                                        |  | March 28, 2003
|L. E. Simmons                                |  |                                                 |  |               
|                                             |  |                                                 |  |               
|/S/ JEFFERY A. SMISEK                        |  | Director                                        |  | March 28, 2003
|Jeffery A. Smisek                            |  |                                                 |  |               
|                                             |  |                                                 |  |               
|/S/ DOUGLAS E. SWANSON                       |  | Director                                        |  | March 28, 2003
|Douglas E. Swanson                           |  |                                                 |  |               
|                                             |  |                                                 |  |               
|/S/ EUGENE R. WHITE                          |  | Director                                        |  | March 28, 2003
|Eugene R. White                              |  |                                                 |  |               
|                                             |  |                                                 |  |               
|/S/ JAMES D. WOODS                           |  | Director                                        |  | March 28, 2003
|James D. Woods                               |  |                                                 |  |               



47



---



CERTIFICATION



I, John F. Lauletta, Chief
Executive Officer and President, certify that:



1.    I have reviewed this Annual Report on Form 10-K of Varco 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 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 28, 2003

/S/    JOHN F.
LAULETTAJohn F. Lauletta Chief Executive Officer and President (Principal Executive Officer)




48



---



I, Clay C. Williams, Vice
President and Chief Financial Officer, certify that:



1.    I have reviewed this Annual Report on Form 10-K of Varco 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 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 28, 2003

/S/    CLAY C. WILLIAMSClay C. Williams Vice President and Chief Financial Officer (Principal Financial Officer)




49



---

REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Stockholders

Varco International, Inc.



We have audited the accompanying consolidated balance sheets of Varco International, Inc. as of
December 31, 2002 and 2001 and the related consolidated statements of income, common stockholders equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included
the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and
schedules 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 consolidated
financial position of Varco International, Inc. at December 31, 2002 and 2001, and the consolidated results of its income and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set
forth therein.



As discussed in Note 2 to the
consolidated financial statements, in 2002, the Company changed its method of accounting for goodwill and other intangible assets.



ERNST & YOUNG LLP



Houston, Texas

January 30, 2003



F-1



---

VARCO INTERNATIONAL, INC.



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                              |  | December 31, 2002 |           |   | December 31, 2001 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ----------------- | -
|                                                                                                                                                                                                                              |  | (in thousands)    |          
|ASSETS                                                                                                                                                                                                                        |  |                   |          
|Current assets:                                                                                                                                                                                                               |  |                   |           |   |                   |  
|Cash and cash equivalents                                                                                                                                                                                                     |  | $                 | 105,997   |   |                   | $
|Accounts receivable, net                                                                                                                                                                                                      |  |                   | 323,456   |   |                   |  
|Inventory, net                                                                                                                                                                                                                |  |                   | 279,958   |   |                   |  
|Deferred tax assets                                                                                                                                                                                                           |  |                   | 15,727    |   |                   |  
|Prepaid expenses and other                                                                                                                                                                                                    |  |                   | 22,840    |   |                   |  
|                                                                                                                                                                                                                              |  |                   |           |   |                   |  
|Total current assets                                                                                                                                                                                                          |  |                   | 747,978   |   |                   |  
|                                                                                                                                                                                                                              |  |                   |           |   |                   |  
|Property and equipment, net                                                                                                                                                                                                   |  |                   | 450,131   |   |                   |  
|Identified intangibles, net                                                                                                                                                                                                   |  |                   | 32,918    |   |                   |  
|Goodwill, net                                                                                                                                                                                                                 |  |                   | 418,659   |   |                   |  
|Other assets, net                                                                                                                                                                                                             |  |                   | 11,374    |   |                   |  
|                                                                                                                                                                                                                              |  |                   |           |   |                   |  
|Total assets                                                                                                                                                                                                                  |  | $                 | 1,661,060 |   |                   | $
|                                                                                                                                                                                                                              |  |                   |           |   |                   |  
|                                                                                                                                                                                                                             
|LIABILITIES AND EQUITY                                                                                                                                                                                                        |  |                   |          
|Current liabilities:                                                                                                                                                                                                          |  |                   |           |   |                   |  
|Accounts payable                                                                                                                                                                                                              |  | $                 | 90,604    |   |                   | $
|Accrued liabilities                                                                                                                                                                                                           |  |                   | 111,430   |   |                   |  
|Income taxes payable                                                                                                                                                                                                          |  |                   | 9,252     |   |                   |  
|Current portion of long-term debt and short-term borrowings                                                                                                                                                                   |  |                   | 7,045     |   |                   |  
|                                                                                                                                                                                                                              |  |                   |           |   |                   |  
|Total current liabilities                                                                                                                                                                                                     |  |                   | 218,331   |   |                   |  
|Long-term debt                                                                                                                                                                                                                |  |                   | 460,883   |   |                   |  
|Pension liabilities and post-retirement obligations                                                                                                                                                                           |  |                   | 24,899    |   |                   |  
|Deferred taxes payable                                                                                                                                                                                                        |  |                   | 35,252    |   |                   |  
|Other liabilities                                                                                                                                                                                                             |  |                   | 1,413     |   |                   |  
|                                                                                                                                                                                                                              |  |                   |           |   |                   |  
|Total liabilities                                                                                                                                                                                                             |  |                   | 740,778   |   |                   |  
|                                                                                                                                                                                                                              |  |                   |           |   |                   |  
|                                                                                                                                                                                                                             
|Common stockholders equity:                                                                                                                                                                                                  |  |                   |           |   |                   |  
|Common stock, $.01 par value, 200,000,000 shares authorized,98,416,012 shares issued
and 96,991,312 shares outstanding at December 31, 2002 (97,402,339 shares issued and 95,977,639 shares outstanding at December 31, 2001) |  |                   | 984       |   |                   |  
|Paid in capital                                                                                                                                                                                                               |  |                   | 525,782   |   |                   |  
|Retained earnings                                                                                                                                                                                                             |  |                   | 427,355   |   |                   |  
|Accumulated other comprehensive loss                                                                                                                                                                                          |  |                   | (18,509   | ) |                   |  
|Less:  treasury stock at cost (1,424,700 shares)                                                                                                                                                                              |  |                   | (15,330   | ) |                   |  
|                                                                                                                                                                                                                              |  |                   |           |   |                   |  
|Total common stockholders equity                                                                                                                                                                                             |  |                   | 920,282   |   |                   |  
|                                                                                                                                                                                                                              |  |                   |           |   |                   |  
|Total liabilities and equity                                                                                                                                                                                                  |  | $                 | 1,661,060 |   |                   | $
|                                                                                                                                                                                                                              |  |                   |           |   |                   |  



See
accompanying notes.





F-2



---

VARCO INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF INCOME



|                                                      |  | Years Ended December 31,              |          
|----------------------------------------------------- |  | ------------------------------------- | ---------
|                                                      |  | 2002                                  |          
|                                                      |  | (in thousands, except per share data) |          
|Revenue:                                              |  |                                       |          
|Sales                                                 |  | $                                     | 810,749  
|Services and rentals                                  |  |                                       | 524,315  
|                                                      |  |                                       |          
|Total                                                 |  |                                       | 1,335,064
|                                                      |  |                                       |          
|                                                     
|Cost and expenses:                                    |  |                                       |          
|Cost of sales                                         |  |                                       | 499,960  
|Cost of services and rentals                          |  |                                       | 452,097  
|Amortization of goodwill                              |  |                                       |         
|Selling, general and administrative                   |  |                                       | 163,383  
|Research and engineering costs                        |  |                                       | 57,072   
|Merger, transaction, and litigation costs             |  |                                       | 6,487    
|                                                      |  |                                       |          
|Total                                                 |  |                                       | 1,178,999
|                                                      |  |                                       |          
|Operating profit                                      |  |                                       | 156,065  
|                                                     
|Other expense (income):                               |  |                                       |          
|Interest expense                                      |  |                                       | 25,608   
|Interest income                                       |  |                                       | (860     
|Foreign exchange loss (gain)                          |  |                                       | 5,201    
|Other                                                 |  |                                       | 3,337    
|                                                      |  |                                       |          
|Income before income taxes                            |  |                                       | 122,779  
|Provision for income taxes                            |  |                                       | 42,972   
|                                                      |  |                                       |          
|Net income                                            |  | $                                     | 79,807   
|                                                      |  |                                       |          
|                                                     
|Earnings per common share:                            |  |                                       |          
|Basic earnings per common share                       |  | $                                     | 0.83     
|                                                      |  |                                       |          
|Dilutive earnings per common share                    |  | $                                     | 0.82     
|                                                      |  |                                       |          
|Weighted average number of common shares outstanding: |  |                                       |          
|Basic                                                 |  |                                       | 96,629   
|                                                      |  |                                       |          
|Dilutive                                              |  |                                       | 97,431   
|                                                      |  |                                       |          



See
accompanying notes.



F-3



---

VARCO INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY

AND COMPREHENSIVE INCOME



|                                                     |  | Shares Outstanding |  | Common Stock $.01 Par Value |     | Paid in Capital |   |         | Retained Earnings |  | Accumulated Other Comprehensive Income (loss) |         |  | Treasury Stock |         |   | Total Common Stockholders Equity |  
|---------------------------------------------------- |  | ------------------ |  | --------------------------- | --- | --------------- | - | ------- | ----------------- |  | --------------------------------------------- | ------- |  | -------------- | ------- | - | --------------------------------- | -
|                                                     |  | (in thousands)     | 
|Balance at December 31, 1999                         |  | 91,178             |  | $                           | 926 |                 | $ | 475,734 |                   |  | $                                             | 243,525 |  | $              | (10,610 | ) |                                   | $
|                                                    
|2000 Comprehensive income:                           |  |                    |  |                             |     |                 |   |         |                   |  |                                               |         |  |                |         |   |                                   |  
|Net income                                           |  |                   |  |                             |    |                 |   |        |                   |  |                                               | 21,055  |  |                |        |   |                                   |  
|Foreign currency translation adjustment              |  |                   |  |                             |    |                 |   |        |                   |  |                                               |        |  |                | (6,311  | ) |                                   |  
|                                                     |  |                    |  |                             |     |                 |   |         |                   |  |                                               |         |  |                |         |   |                                   |  
|2000 Comprehensive income                            |  |                   |  |                             |    |                 |   |        |                   |  |                                               | 21,055  |  |                | (6,311  | ) |                                   |  
|Common stock issued                                  |  | 1,297              |  |                             | 13  |                 |   | 12,212  |                   |  |                                               |        |  |                |        |   |                                   |  
|Common stock issued executive match program          |  | 323                |  |                             | 3   |                 |   | 6,428   |                   |  |                                               |        |  |                |        |   |                                   |  
|Conversion of stock warrants                         |  | 2,023              |  |                             | 20  |                 |   | (20     | )                 |  |                                               |        |  |                |        |   |                                   |  
|Tax benefit of options exercised                     |  |                   |  |                             |    |                 |   | 4,338   |                   |  |                                               |        |  |                |        |   |                                   |  
|                                                     |  |                    |  |                             |     |                 |   |         |                   |  |                                               |         |  |                |         |   |                                   |  
|Balance at December 31, 2000                         |  | 94,821             |  |                             | 962 |                 |   | 498,692 |                   |  |                                               | 264,580 |  |                | (16,921 | ) |                                   |  
|                                                    
|2001 Comprehensive income:                           |  |                    |  |                             |     |                 |   |         |                   |  |                                               |         |  |                |         |   |                                   |  
|Net income                                           |  |                   |  |                             |    |                 |   |        |                   |  |                                               | 82,968  |  |                |        |   |                                   |  
|Foreign currency translation adjustment              |  |                   |  |                             |    |                 |   |        |                   |  |                                               |        |  |                | (2,094  | ) |                                   |  
|                                                     |  |                    |  |                             |     |                 |   |         |                   |  |                                               |         |  |                |         |   |                                   |  
|2001 Comprehensive income                            |  |                   |  |                             |    |                 |   |        |                   |  |                                               | 82,968  |  |                | (2,094  | ) |                                   |  
|Common stock issued                                  |  | 1,101              |  |                             | 11  |                 |   | 10,806  |                   |  |                                               |        |  |                |        |   |                                   |  
|Common stock issued in exchange for convertible debt |  | 56                 |  |                             | 1   |                 |   | 833     |                   |  |                                               |        |  |                |        |   |                                   |  
|Tax benefit of options exercised                     |  |                   |  |                             |    |                 |   | 3,806   |                   |  |                                               |        |  |                |        |   |                                   |  
|                                                     |  |                    |  |                             |     |                 |   |         |                   |  |                                               |         |  |                |         |   |                                   |  
|Balance at December 31, 2001                         |  | 95,978             |  |                             | 974 |                 |   | 514,137 |                   |  |                                               | 347,548 |  |                | (19,015 | ) |                                   |  
|                                                    
|2002 Comprehensive income:                           |  |                    |  |                             |     |                 |   |         |                   |  |                                               |         |  |                |         |   |                                   |  
|Net income                                           |  |                   |  |                             |    |                 |   |        |                   |  |                                               | 79,807  |  |                |        |   |                                   |  
|Foreign currency translation adjustment              |  |                   |  |                             |    |                 |   |        |                   |  |                                               |        |  |                | (840    | ) |                                   |  
|Gain from interest rate contract                     |  |                   |  |                             |    |                 |   |        |                   |  |                                               |        |  |                | 1,346   |   |                                   |  
|                                                     |  |                    |  |                             |     |                 |   |         |                   |  |                                               |         |  |                |         |   |                                   |  
|2002 Comprehensive income                            |  |                   |  |                             |    |                 |   |        |                   |  |                                               | 79,807  |  |                | 506     |   |                                   |  
|Common stock issued                                  |  | 1,002              |  |                             | 10  |                 |   | 9,533   |                   |  |                                               |        |  |                |        |   |                                   |  
|Common stock issued in exchange for convertible debt |  | 11                 |  |                             |    |                 |   | 167     |                   |  |                                               |        |  |                |        |   |                                   |  
|Tax benefit of options exercised                     |  |                   |  |                             |    |                 |   | 1,945   |                   |  |                                               |        |  |                |        |   |                                   |  
|                                                     |  |                    |  |                             |     |                 |   |         |                   |  |                                               |         |  |                |         |   |                                   |  
|Balance at December 31, 2002                         |  | 96,991             |  | $                           | 984 |                 | $ | 525,782 |                   |  | $                                             | 427,355 |  | $              | (18,509 | ) |                                   | $
|                                                     |  |                    |  |                             |     |                 |   |         |                   |  |                                               |         |  |                |         |   |                                   |  





See accompanying notes.



F-4



---

VARCO INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  | Years Ended December 31, |         
|--------------------------------------------------------------------------------- |  | ------------------------ | --------
|                                                                                  |  | 2002                     |         
|                                                                                  |  | (in thousands)           |         
|Cash flows from operating activities:                                             |  |                          |         
|Net income                                                                        |  | $                        | 79,807  
|Adjustments to reconcile net income to net cash provided by operating
activities: |  |                          |         
|Depreciation and amortization                                                     |  |                          | 59,246  
|Non-cash merger and transaction costs                                             |  |                          |        
|Provision for losses on accounts receivable                                       |  |                          | 2,894   
|Provision for losses on inventory                                                 |  |                          | 7,702   
|Provision (benefit) for deferred taxes                                            |  |                          | 7,219   
|Write off investments                                                             |  |                          |        
|Stock compensation                                                                |  |                          |        
|Other non-cash charges                                                            |  |                          | (607    
|Changes in current assets and liabilities, net of effects from
acquisitions:      |  |                          |         
|Accounts receivable                                                               |  |                          | 35,358  
|Inventory                                                                         |  |                          | (54,032 
|Prepaid expenses and other assets                                                 |  |                          | 3,150   
|Accounts payable, accrued liabilities and other                                   |  |                          | (22,984 
|Income taxes payable                                                              |  |                          | (15,970 
|                                                                                  |  |                          |         
|Net cash provided by operating activities                                         |  |                          | 101,783 
|                                                                                  |  |                          |         
|                                                                                 
|Cash flows used for investing activities:                                         |  |                          |         
|Capital expenditures                                                              |  |                          | (49,377 
|Proceeds from the sale of fixed assets                                            |  |                          |        
|Business acquisitions, net of cash acquired                                       |  |                          | (152,363
|Other                                                                             |  |                          | (593    
|                                                                                  |  |                          |         
|Net cash used for investing activities                                            |  |                          | (202,333
|                                                                                  |  |                          |         
|                                                                                 
|Cash flows provided by (used for) financing activities:                           |  |                          |         
|Borrowings under financing agreements, net                                        |  |                          | 239,388 
|Principal payments under financing agreements                                     |  |                          | (100,168
|Debt issue costs                                                                  |  |                          | (1,732  
|Proceeds from interest rate contract                                              |  |                          | 1,346   
|Proceeds from sale of common stock, net                                           |  |                          | 9,543   
|                                                                                  |  |                          |         
|Net cash provided by (used for) financing activities                              |  |                          | 148,377 
|                                                                                  |  |                          |         
|Effect of exchange rate changes on cash                                           |  |                          | 671     
|Net increase (decrease) in cash and cash equivalents                              |  |                          | 48,498  
|                                                                                 
|Cash and cash equivalents:                                                        |  |                          |         
|Beginning of period                                                               |  |                          | 57,499  
|                                                                                  |  |                          |         
|End of period                                                                     |  | $                        | 105,997 
|                                                                                  |  |                          |         
|                                                                                 
|Supplemental disclosure of cash information:                                      |  |                          |         
|Cash paid during the year for:                                                    |  |                          |         
|Interest                                                                          |  | $                        | 24,826  
|                                                                                  |  |                          |         
|Taxes                                                                             |  | $                        | 52,753  
|                                                                                  |  |                          |         



See
accompanying notes.



F-5



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    Basis of Presentation



Consolidation



The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.



Nature of Business and Risk Factors



The Company provides highly engineered drilling and well-servicing equipment, products and services to the worlds oil and gas
industry. The Company operates in four principal business segments: Drilling Equipment Sales, Tubular Services, Drilling Services and Coiled Tubing and Wireline Products. A more detailed description of products and services is provided in Note 12
Business Segments and Foreign Operations.



The Companys overall results depend largely on the level of worldwide oil drilling and production activity, the prices of oil and gas, the level of capital investments by other oilfield service firms, and worldwide oil and gas
inventory levels. Demand for the Companys Drilling Equipment Sales is largely dependent on the level of offshore drilling activity and on capital investment by drilling contractors. Demand for the Companys Tubular Services is based on
the relatively low cost of its services compared to the costs to a customer of a failure or interruption in service. Demand for the Companys Drilling Services is due to the reduction of drilling costs in land and offshore drilling operations,
and its ability to help minimize the environmental impact of drilling operations. Demand for the Companys Coiled Tubing & Wireline equipment is due to the economic benefits Coiled Tubing equipment provides in oil and gas workover
operations versus conventional techniques, including reduced service time, and the continuous production of the well.



The Company operates in over 40 countries around the world. Its revenues are geographically located in North America (50%), Latin America
(10%), Europe, Africa, and the Middle East (29%), and the Far East (11%). As a result of its international presence, the Companys operations are subject to the risks normally associated with conducting businesses in foreign countries,
including uncertain political and economic environments, which may limit or disrupt markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property without compensation. In addition, the Company has
significant customer concentrations in the Middle East, Latin America and the Far East whose spending can be volatile based on oil price changes, the political environment and delays in the government budget. Adverse changes in individual
circumstances can have a significant negative impact on the financial performance of the Company.



2.    Summary of Significant Accounting Policies



Revenue Recognition



The Companys products and services are generally sold based upon purchase orders or contracts with the customer that include fixed
or determinable prices and that do not include right of return or other similar provisions or other significant post delivery obligations. The Company records revenue at the time its manufacturing process is complete, the customer has been provided
with all proper inspection and other required documentation, title and risk of loss has passed to the customer and when collectibility is reasonably assured. The Company also recognizes revenue on bill-and-hold transactions where the product has
been completed and is ready to be shipped, however at the customers request, the Company is storing the product on the customers behalf for a brief period of time, typically less than one year. Customer advances or deposits are deferred
and recognized as revenue when the Company has completed all of its performance obligations related to the sale. The Company also recognizes revenue as services are performed. The amounts billed for shipping and handling cost are included in revenue
and related costs are included in costs of sales.



F-6



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Cash
and Cash Equivalents



The Company considers
all highly liquid investments with a maturity of three months or less to be cash equivalents.



Financial Instruments and Concentrations of Credit Risk



The carrying amounts of financial instruments including cash and cash equivalents, short-term investments, accounts receivable and
accounts payable approximated fair value because of the relatively short maturity of these instruments. The carrying value of debt approximated fair values as of December 31, 2002 and 2001 except for the Companys $100,000,000 71⁄2% Senior
Notes due 2008, and $200,000,000 71⁄4% Senior Notes due 2011. Based on information provided by a national brokerage company, the $100 million Senior Notes were valued at $111,146,000 and $103,030,000 at December 31, 2002 and 2001, and the $200
million Senior Notes were valued at $211,601,000 and $199,960,000 at December 31, 2002 and 2001. The fair value of the $150,000,000 51⁄2% Senior Notes approximates its carrying value at December 31, 2002. The fair value of other financial
instruments approximate their carrying value at December 31, 2002.



Substantially all of the Companys accounts receivable are due from customers in the oil and gas industry, both in the United States and internationally. The Company performs periodic credit evaluations of its customers
and generally does not require collateral. In certain circumstances, the Company requires letters of credit to further insure credit worthiness.



Reserve for bad debts are determined on a specific identification basis when we believe that the required payment of specific amounts owed
to us is not probable. Accounts receivable are net of allowances for doubtful accounts of approximately $11,558,000 and $11,517,000 at December 31, 2002 and 2001, respectively.



Inventory



Inventories are stated at the lower of cost or market. The Company determines the cost of inventories using the last-in, first-out
(LIFO) method for certain of its Drilling Equipment Sales inventory (representing 12% of total inventory) and the weighted average method for other inventory. Reserves for inventory obsolescence are determined based on our historical
usage of inventory on-hand as well as our future expectations related to our substantial installed base and the development of new products. Inventory is net of our reserve of excess and obsolete inventory of approximately $28,993,000 and
$31,028,000 at December 31, 2002 and 2001, respectively.



Property and equipment



Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives for financial reporting purposes and generally by the accelerated or
modified accelerated costs recovery systems for income tax reporting purposes. Estimated useful lives are 30 years for buildings and 5-12 years for machinery and equipment. The cost of repairs and maintenance is charged to income as incurred. Major
repairs and improvements are capitalized and depreciated over the remaining useful life of the asset. The depreciation of fixed assets recorded under capital lease agreements is included in depreciation expense. Property and equipment depreciation
expense was $54,889,000, 53,781,000, and $44,789,000 for the years ended December 31, 2002, 2001, and 2000, respectively.



Goodwill and Identified intangibles



In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business
Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets



F-7



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(SFAS 142), effective for fiscal years beginning after December 15, 2001. Under SFAS 141 all business combinations initiated after June 30,
2001 were accounted for under the purchase method of accounting. Under SFAS 142, intangible assets deemed to have indefinite lives (including goodwill) will no longer be amortized but will be subject to annual impairment tests in accordance with the
Statements. Accordingly, the Company did not amortize any goodwill purchased after June 30, 2001. Other intangible assets will continue to be amortized over their useful lives.



Identified intangibles with determinable lives are being amortized on a straight-line basis, over estimated
useful lives between 5 and 40 years, and are presented net of accumulated amortization of approximately $30,202,000 and $26,369,000 at December 31, 2002 and 2001, respectively. Identified intangibles consist primarily of technology, patents,
trademarks, license agreements, existing service contracts and covenants not to compete. Amortization expense of identified intangibles for the next five years is estimated to be $12,600,000.



Goodwill represents the excess of the purchase price over the
fair market value of the net assets acquired. Prior to the adoption of SFAS 142, such excess costs were being amortized on a straight-line basis over lives ranging from 10-40 years depending on the estimated economic life. Accumulated amortization
at December 31, 2002 and 2001 was approximately $55,361,000.



The effects of not amortizing goodwill and other intangible assets in periods prior to adoption of SFAS 142 follows (in thousands except per share data):



|                                              |  | Year ended December 31,
|--------------------------------------------- |  | -----------------------
|                                              |  | 2001                   
|Net income as reported                        |  | $                      
|Add: Amortization of goodwill                 |  |                        
|                                              |  |                        
|Net income as adjusted                        |  | $                      
|                                              |  |                        
|Basic earnings per common share as reported   |  | $                      
|Add: Amortization of goodwill                 |  |                        
|                                              |  |                        
|Basic earnings per common share as adjusted   |  | $                      
|                                              |  |                        
|Diluted earnings per common share as reported |  | $                      
|Add: Amortization of goodwill                 |  |                        
|                                              |  |                        
|Diluted earnings per common share as adjusted |  | $                      
|                                              |  |                        



On at
least an annual basis, the Company assesses whether goodwill is impaired. The annual impairment tests are performed at the beginning of the fourth quarter of each year. If it is determined that goodwill is impaired, that impairment is measured based
on the amount by which the book value of goodwill exceeds its implied fair value. The implied fair value of goodwill is determined by deducting the fair value of a reporting units identifiable assets and liabilities from the fair value of that
reporting unit as a whole. Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances that would indicate that, more likely than not, the carrying amount of goodwill has been
impaired. Fair value of the reporting units is determined based on internal management estimates.



Impairment of Long-Lived Assets



Effective January 1, 2002, the Company adopted SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
144 superceded SFAS 121, Accounting for the Impairment of Long-Lived Assets



F-8



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



and for Long-Lived Assets to be Disposed Of. The adoption of SFAS 144 had no effect on the Companys results of operations.
Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. The net
carrying value of assets not recoverable is reduced to fair value if lower than carrying value. In determining the fair market value of the assets, the Company considers market trends and recent transactions involving sales of similar assets, or
when not available, discounted cash flow analysis. Long- lived assets expected to be disposed of, including excess equipment and production facilities held for sale, are stated at their estimated fair value less costs to sell.



Warranty Accruals



Accruals for warranty claims are provided based on historical
experience at the time of sale. Product warranties generally cover periods from one to three years. Our accruals for warranty claims are affected by the size of our installed base of products currently under warranty, as well as new products
delivered to the market.



Environmental
Liabilities



When environmental assessments
or remediations are probable and the costs can be reasonable estimated, remediation liabilities are recorded on an undiscounted basis and are adjusted as further information develops or circumstances change.



Income taxes



The liability method is used to account for income taxes.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. The provision for income taxes is the tax payable or refundable for the period plus or
minus the change during the period in deferred tax assets and liabilities.



Derivative financial instruments



The Company records all derivative financial instruments at their fair value in our consolidated balance sheet. All derivative financial instruments the Company holds are designated as cash flow hedges
and are highly effective in offsetting movements in the underlying risks. Accordingly, gains and losses from changes in the fair value of derivative financial instruments are deferred and recognized in earnings as the underlying transactions occur.
Because the derivative financial instruments are so closely related to the underlying transactions, hedge ineffectiveness is insignificant.



Foreign exchange rates



Revenue and expenses for foreign operations have been translated into U.S. dollars using average exchange rates and reflect currency
exchange gains and losses resulting from transactions conducted in other than functional currencies.



The assets and liabilities of certain foreign subsidiaries are translated at current exchange rates and the related translation
adjustments are recorded directly in stockholders equity. For subsidiaries which operate in countries which have highly inflationary economies, certain assets are translated at historical exchange rates and all translation adjustments are
reflected in the statements of income.



F-9



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Stock
based compensation



The Company accounts for
stock option grants to employees in accordance with the intrinsic value method.



Earnings per common share



Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. The Companys diluted earnings per common share is
calculated by adjusting net income for after-tax interest expense on convertible debt and dividing that number by the weighted average number of common shares outstanding plus shares which would be assumed outstanding after conversion of convertible
debt, vested stock options and outstanding stock warrants under the treasury stock method.



The following table sets forth the computation of basic and dilutive earnings per share (net income in thousands):



|                                                 |  | Years Ended December 31,
|------------------------------------------------ |  | ------------------------
|                                                 |  | 2002                    
|Numerator:                                       |  |                         
|Net income                                       |  | $                       
|                                                 |  |                         
|Denominator:                                     |  |                         
|Basicweighted average common shares outstanding |  |                         
|Dilutive effect of:                              |  |                         
|Employee stock options                           |  |                         
|Stock Warrants                                   |  |                         
|Executive Stock Match Program                    |  |                         
|Convertible Note                                 |  |                         
|Dilutive outstanding shares                      |  |                         
|                                                 |  |                         
|Basic earnings per share                         |  | $                       
|                                                 |  |                         
|Dilutive earnings per share                      |  | $                       
|                                                 |  |                         



Use
of estimates in the preparation of financial statements



The consolidated financial statements and related notes, which have been prepared in conformity with generally accepted accounting principles, require the use of management estimates. Actual results could differ from these estimates.



Reclassification



Certain amounts in the 2001 and 2000 financial statements
have been reclassified to conform with current year classifications.



New Accounting Standards



In August 2001, the Financial Accounting Standards Board issued statement of Financial Accounting Standard No 143, Accounting for Asset Retirement Obligations, (SFAS 143). SFAS 143 requires a company to recognize a
liability associated with a legal obligation to retire or remove any tangible long-lived assets. The new



F-10



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



statement is effective beginning in 2003 and the Company is currently evaluating if it will have a material impact on its financial position
or results of operations.



In July 2002, the
Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146) which addresses financial accounting and reporting costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit An Activity (including Certain Costs Incurred in a Restructuring).
SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of an entitys commitment to an
exit plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. If the Company had early adopted statement SFAS 146, it would not have affected the Companys accounting for
restructuring activities which occurred in 2002.



3.    Acquisitions



Fiscal 2002



On September
6, 2002, the Company acquired substantially all of ICO Inc.s oilfield services business for approximately $138,630,000 including cash of $136,240,000 and accrued payables of $2,390,000. The acquisition of ICOs oilfield services business
further solidified the Companys worldwide leadership position in the oilfield inspection and coating markets. The combination of the Companys and ICOs business is expected to create operating efficiencies and reduce costs through
operational integration. ICOs oilfield services business provides inspection, coating and reconditioning of drill pipe, tubing, casing and sucker rods used in oil and gas operations. Additionally, it sells and rents equipment and supplies used
in the inspection of tubular goods and sucker rods. Under the purchase agreement, the Company acquired the assets of ICOs oilfield services business in the U.S., Mexico, Southeast Asia and Europe and the stock of ICOs Canadian operating
subsidiary. The Company incurred transaction costs of approximately $3,658,000 related primarily to the write off of duplicate facilities as a result of the ICO acquisition.



The Company also completed six other acquisitions in 2002 for an aggregate purchase price of $15,036,000
including cash of $13,736,000 and notes payable of $1,300,000. These acquisitions included:



| |  |  | A & A Tubular Inspection Inc., a California provider of inspection and reclamation of oilfield tubular goods and sucker rods.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Environmental Rig Solutions, a Texas based provider of equipment to enhance waste management on customer well sites.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Marr Associates Pipeline Integrity, Ltd, a Canada based provider of integrity and data management, direct assessment, corrosion control and stress corrosion cracking
services to the Pipeline industry.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-11



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition of the 2002 acquisitions (in thousands):



|                              |  | ICO |         | All Other Acquisitions |   | Total 
|----------------------------- |  | --- | ------- | ---------------------- | - | ------
|Current assets                |  | $   | 23,201  |                        | $ | 2,165 
|Property, plant and equipment |  |     | 46,910  |                        |   | 3,756 
|Intangible assets             |  |     |        |                        |   | 4,406 
|Goodwill                      |  |     | 86,425  |                        |   | 5,920 
|Other assets                  |  |     | 702     |                        |   | 2,038 
|                              |  |     |         |                        |   |       
|Total assets acquired         |  |     | 157,238 |                        |   | 18,285
|                              |  |     |         |                        |   |       
|Current liabilities           |  |     | 17,444  |                        |   | 2,393 
|Long term debt                |  |     | 2,926   |                        |   | 750   
|Other liabilities             |  |     | 628     |                        |   | 20    
|                              |  |     |         |                        |   |       
|Total liabilities             |  |     | 20,998  |                        |   | 3,163 
|                              |  |     |         |                        |   |       
|Net assets acquired           |  | $   | 136,240 |                        | $ | 15,122
|                              |  |     |         |                        |   |       



Goodwill allocated to business segments in 2002 was $90,296,000 for Tubular Services and $2,049,000 for Drilling Services.



Fiscal 2001



In January, 2001, the Company acquired Quality Tubing Inc., a manufacturer of coiled tubing which is used in conjunction with specialized
equipment manufactured by the Company to remediate and drill oil and gas wells, for an aggregate cash purchase price of approximately $55,020,000. This acquisition complements Varcos comprehensive offering of coiled tubing technology,
combining coiled tubing with the equipment required to run it.



The Company also completed fourteen additional acquisitions for an aggregate purchase price of $99,044,000 consisting of cash of $90,397,000 and notes and accrued payables of $8,647,000. These acquisitions included:



| |  |  | Chimo Equipment Ltd., a Canadian provider of rig instrumentation equipment and services.
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Albins Enterprises Inc., an Oklahoma based designer, manufacturer, rebuilder, and refurbisher of high-pressure nitrogen pumping units and related equipment.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fibercast, an Oklahoma based fiberglass tubing manufacturer.
| | - |  | ------------------------------------------------------------



| |  |  | Elmar Services Limited, an Aberdeen based designer and manufacturer of wireline pressure control equipment for servicing oil and gas wells.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Morinoak International Limited, a supplier of derricks, substructures and structural drilling rig components based in England.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



F-12



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition of the 2001 acquisitions (in thousands):



|                              |  | Quality Tubing |        | All Other Acquisitions |   | Total  
|----------------------------- |  | -------------- | ------ | ---------------------- | - | -------
|Current assets                |  | $              | 15,377 |                        | $ | 41,200 
|Property, plant and equipment |  |                | 8,049  |                        |   | 33,494 
|Intangible assets             |  |                | 146    |                        |   | 7,398  
|Goodwill                      |  |                | 40,639 |                        |   | 57,228 
|                              |  |                |        |                        |   |        
|Total assets acquired         |  |                | 64,211 |                        |   | 139,320
|                              |  |                |        |                        |   |        
|Current liabilities           |  |                | 7,291  |                        |   | 32,948 
|Long term debt                |  |                | 1,107  |                        |   | 10,711 
|Other liabilities             |  |                | 793    |                        |   | 2,680  
|                              |  |                |        |                        |   |        
|Total liabilities             |  |                | 9,191  |                        |   | 46,339 
|                              |  |                |        |                        |   |        
|Net assets acquired           |  | $              | 55,020 |                        | $ | 92,981 
|                              |  |                |        |                        |   |        



The
following table summarizes goodwill additions for 2001 acquisitions by business segment (in thousands):



|                                  |  | 2001
|--------------------------------- |  | ----
|Drilling Equipment Sales          |  | $   
|Tubular Services                  |  |     
|Drilling Services                 |  |     
|Coiled Tubing & Wireline Products |  |     
|                                  |  |     
|Total goodwill                    |  | $   
|                                  |  |     



Fiscal 2000



The Company
completed three acquisitions for an aggregate purchase price of $24,106,000 consisting of cash of $21,685,000 and accrued cash payments of $2,421,000.



Each of the acquisitions were accounted for using the purchase method of accounting and, accordingly, the results of operations of each
business is included in the consolidated results of operations from the date of acquisition. A summary of the acquisitions follows (in thousands):



|                                                         |  | 2002 |          |   | 2001 |   |          | 2000 | 
|-------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- | 
|Fair value of assets acquired                            |  | $    | 176,343  |   |      | $ | 201,483  |      | 
|Cash paid                                                |  |      | (152,363 | ) |      |   | (145,953 | )    | 
|                                                         |  |      |          |   |      |   |          |      | 
|Liabilities assumed and debt issued                      |  | $    | 23,980   |   |      | $ | 55,530   |      | 
|                                                         |  |      |          |   |      |   |          |      | 
|Excess purchase price over fair value of assets acquired |  | $    | 92,345   |   |      | $ | 97,867   |      | 
|                                                         |  |      |          |   |      |   |          |      | 



Other



Cash paid in 2002 and 2001 includes
$2,388,000 and $536,000 for 2001 and 2000 acquisitions, respectively.



The following unaudited pro forma information presents a summary of the consolidated results of operations of the Company as if these acquisitions had occurred at the beginning of 2001. The pro forma information includes
certain adjustments which give effect to amortization of goodwill, interest expense on acquisition debt



F-13



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



and other adjustments, together with related income tax effects. The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the transactions been effected at the beginning of 2001.



|                                   |  | 2002 |           | 2001
|---------------------------------- |  | ---- | --------- | ----
|Revenue                            |  | $    | 1,411,266 |     
|                                   |  |      |           |     
|Net income                         |  | $    | 81,343    |     
|                                   |  |      |           |     
|Dilutive earnings per common share |  | $    | 0.83      |     
|                                   |  |      |           |     



4.    Inventory



At December 31, inventories consist of the following (in thousands):



|                                           |  | 2002 |         |   | 2001 |  
|------------------------------------------ |  | ---- | ------- | - | ---- | -
|Raw materials                              |  | $    | 83,660  |   |      | $
|Work in progress                           |  |      | 65,192  |   |      |  
|Finished goods                             |  |      | 170,640 |   |      |  
|Inventory reserves including LIFO reserves |  |      | (39,534 | ) |      |  
|                                           |  |      |         |   |      |  
|Inventory, net                             |  | $    | 279,958 |   |      | $
|                                           |  |      |         |   |      |  



5.    Property, plant and equipment



At December 31, property, plant, and equipment consist of the following (in thousands):



|                              |  | 2002 |          |   | 2001 |  
|----------------------------- |  | ---- | -------- | - | ---- | -
|Land and buildings            |  | $    | 172,196  |   |      | $
|Operating equipment           |  |      | 379,295  |   |      |  
|Rental equipment              |  |      | 230,890  |   |      |  
|                              |  |      |          |   |      |  
|                              |  |      | 782,381  |   |      |  
|Less accumulated depreciation |  |      | (332,250 | ) |      |  
|                              |  |      |          |   |      |  
|                              |  | $    | 450,131  |   |      | $
|                              |  |      |          |   |      |  



6.    Accrued Liabilities



At December 31, accrued liabilities consist of the following (in thousands):



|                   |  | 2002 |         | 2001
|------------------ |  | ---- | ------- | ----
|Compensation       |  | $    | 38,249  |     
|Warranty           |  |      | 9,368   |     
|Interest           |  |      | 6,439   |     
|Taxes (non income) |  |      | 7,387   |     
|Insurance          |  |      | 11,989  |     
|Other              |  |      | 37,998  |     
|                   |  |      |         |     
|                   |  | $    | 111,430 |     
|                   |  |      |         |     



F-14



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





7.    Income Taxes



The components of income before income taxes consist of the following (in thousands):



|        |  | 2002 |         | 2001 |   | 2000   
|------- |  | ---- | ------- | ---- | - | -------
|U.S.    |  | $    | 62,373  |      | $ | 59,866 
|Foreign |  |      | 60,406  |      |   | 72,229 
|        |  |      |         |      |   |        
|        |  | $    | 122,779 |      | $ | 132,095
|        |  |      |         |      |   |        



Such
income is inclusive of various intercorporate eliminations of income or expense items, such as royalties, interest and similar items that are taxable or deductible in the respective locations. Such income is also inclusive of export sales by U.S.
locations. Therefore, the relationship of domestic and foreign taxes to reported U.S. and foreign income is not representative of actual effective tax rates.



The provision (benefit) for income taxes consists of the following at December 31 (in thousands):



|                                   |  | 2002 |        | 2001 |   |        | 2000
|---------------------------------- |  | ---- | ------ | ---- | - | ------ | ----
|Current provision:                 |  |      |        |      |   |        |     
|U.S.                               |  | $    | 17,609 |      | $ | 27,809 |     
|Foreign                            |  |      | 18,144 |      |   | 29,464 |     
|                                   |  |      |        |      |   |        |     
|Total current provision            |  |      | 35,753 |      |   | 57,273 |     
|                                   |  |      |        |      |   |        |     
|Deferred provision (benefit):      |  |      |        |      |   |        |     
|U.S.                               |  |      | 3,012  |      |   | (3,162 | )   
|Foreign                            |  |      | 4,207  |      |   | (4,984 | )   
|                                   |  |      |        |      |   |        |     
|Total deferred provision (benefit) |  |      | 7,219  |      |   | (8,146 | )   
|                                   |  |      |        |      |   |        |     
|Total provision                    |  | $    | 42,972 |      | $ | 49,127 |     
|                                   |  |      |        |      |   |        |     



The
reconciliation of the expected to the computed tax provision (benefit) is as follows at December 31 (in thousands):



|                                                             |  | 2002 |        |   | 2001 |   |        | 2000 | 
|------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- | 
|Tax expense at federal statutory rate                        |  | $    | 42,972 |   |      | $ | 46,232 |      | 
|Incremental effect of foreign operations                     |  |      | 2,991  |   |      |   | 4,446  |      | 
|Nondeductible goodwill amortization and merger related costs |  |      |       |   |      |   | 1,621  |      | 
|State income taxes, net of federal benefit                   |  |      | 163    |   |      |   |       |      | 
|FSC benefit                                                  |  |      | (3,705 | ) |      |   | (3,490 | )    | 
|Change in valuation allowance                                |  |      |       |   |      |   |       |      | 
|Other, net                                                   |  |      | 551    |   |      |   | 318    |      | 
|                                                             |  |      |        |   |      |   |        |      | 
|                                                             |  | $    | 42,972 |   |      | $ | 49,127 |      | 
|                                                             |  |      |        |   |      |   |        |      | 



F-15



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Significant components of the Companys deferred tax liabilities and assets as of December 31, are as follows (in thousands):



|                                                       |  | 2002 |        |   | 2001 |  
|------------------------------------------------------ |  | ---- | ------ | - | ---- | -
|Gross deferred tax assets:                             |  |      |        |   |      |  
|Receivables                                            |  | $    | 2,547  |   |      | $
|U.S. and foreign net operating losses                  |  |      | 2,228  |   |      |  
|Accrued liabilities and other reserves                 |  |      | 3,613  |   |      |  
|Inventory reserves and intercompany profit elimination |  |      | 14,524 |   |      |  
|Tax credit carry forwards                              |  |      |       |   |      |  
|Post retirement benefit obligation                     |  |      | 2,428  |   |      |  
|                                                       |  |      |        |   |      |  
|Subtotal gross deferred tax assets                     |  |      | 25,340 |   |      |  
|Valuation allowance                                    |  |      | (1,975 | ) |      |  
|                                                       |  |      |        |   |      |  
|Net deferred tax assets                                |  |      | 23,365 |   |      |  
|                                                       |  |      |        |   |      |  
|Gross deferred tax liabilities:                        |  |      |        |   |      |  
|Property and equipment                                 |  |      | 35,339 |   |      |  
|Intangible assets                                      |  |      | 1,051  |   |      |  
|Reserve for unremitted foreign earnings                |  |      | 6,500  |   |      |  
|All other                                              |  |      |       |   |      |  
|                                                       |  |      |        |   |      |  
|Gross deferred tax liabilities                         |  |      | 42,890 |   |      |  
|                                                       |  |      |        |   |      |  
|Total net deferred tax liability                       |  | $    | 19,525 |   |      | $
|                                                       |  |      |        |   |      |  



The
total net deferred tax liability at December 31, 2002 is comprised of $15,727,000 of net current tax assets and $35,252,000 net noncurrent deferred tax liabilities.



The Company has made provision for additional taxes on the anticipated repatriation of certain earnings from
its foreign subsidiaries. Undistributed earnings of its foreign subsidiaries in excess of the amount already provided is considered permanently reinvested. It is not practical to determine the amount of federal income taxes, if any, that might
become due in the event that the balance of such earnings were to be distributed.



At December 31, 2002 the Company has approximately $7,893,000 of foreign net operating loss carryforwards, the majority of which have a three year life. The Company has a valuation allowance of
$1,975,000 against these net operating losses as the Company believes that the corresponding deferred tax asset may not be fully realizable.



The Company is currently engaged in tax audits and appeals in various tax jurisdictions. The years covered by each audit or appeal vary
considerably among legal entities. Assessments, if any, are not expected to have a material adverse effect on the financial statements.



F-16



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





8.    Long-term Debt



At December 31, long-term debt consists of the following (in thousands):



|                                                                                                 |  | 2002 |         | 2001
|------------------------------------------------------------------------------------------------ |  | ---- | ------- | ----
|$200,000 Senior Notes, interest at 7.25% payable semiannually, principal due on May 1,
2011      |  | $    | 201,361 |     
|$100,000 Senior Notes, interest at 7.5% payable semiannually, principal due
on February 15, 2008 |  |      | 99,263  |     
|$150,000 Senior Notes, interest at 5.5% payable semiannually, principal due
on November 19, 2012 |  |      | 149,215 |     
|Other                                                                                            |  |      | 18,089  |     
|                                                                                                 |  |      |         |     
|Total debt                                                                                       |  |      | 467,928 |     
|Less: Current maturities                                                                         |  |      | 7,045   |     
|                                                                                                 |  |      |         |     
|Long-term debt                                                                                   |  | $    | 460,883 |     
|                                                                                                 |  |      |         |     



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



|2004       |  | $    5,564
|---------- |  | ----------
|2005       |  | 1,862     
|2006       |  | 1,373     
|2007       |  | 2,056     
|Thereafter |  | 450,028   
|           |  |           
|           |  | $460,883  
|           |  |           



Senior Notes



On February
25, 1998, the Company issued $100,000,000 of 71/2% Senior Notes due 2008 (2008 Notes). On May 1, 2001, the Company issued $200,000,000 71/4% Senior Notes due
2011 (2011 Notes). On November 19, 2002, the Company issued $150,000,000 of 5.5% Senior Notes due 2012 (2012 Notes). The 2008 Notes, 2011 Notes, and 2012 Notes are fully and unconditionally guaranteed, on a joint
and several basis, by certain wholly-owned subsidiaries of the Company (collectively Guarantor Subsidiaries and individually Guarantor). Each of the guarantees is an unsecured obligation of the Guarantor and ranks pari
passuwith the guarantees provided by and the obligations of such Guarantor Subsidiaries under the credit agreement and with all existing and future unsecured indebtedness of such Guarantor for borrowed money that is not, by its terms, expressly
subordinated in right of payment to such guarantee.



New Revolver Facility



On January 30, 2002, the Company entered into a new credit agreement with a syndicate of banks that provided up to $125.0 million of funds under a revolving credit facility. The credit facility was later expanded to $150.0 million.
The facility expires on January 30, 2005. The facility is secured by guarantees of material U.S. subsidiaries. The interest rate on the borrowed portion of the revolver is based on the Companys rating by S&P and Moodys which at the
time of the agreement resulted in an interest rate of LIBOR + 0.625% or the prime rate. Commitment fees range from 0.1% to 0.25% depending on the Company rating.



Other



Based upon information obtained from a national brokerage company at December 31, 2002, the fair value of the 2008 Notes was approximately
$111,146,000, and the fair value of the 2011 Notes was approximately



F-17



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



$211,601,000. The fair value of the 2012 Notes is undeterminable at December 31, 2002, as they were unregistered securities. A registration
statement was filed on December 23, 2002 for the exchange of unregistered 2012 Notes for registered 2012 Notes. The carrying value of the Companys other debt, approximates its fair value. Other debt includes $3,371,459 in promissory notes due
to former owners of businesses acquired who remain employed by the Company.



At December 31, 2002, the Company had outstanding letters of credit of $22,877,473.



9.    Retirement and Other Benefit Plans



During the periods reported, substantially all the Companys U.S. employees were covered by defined
contribution retirement plans. The Company also has a deferred compensation plan for its highly compensated employees to permit retirement contributions in excess of the statutory limits. Employees may voluntarily contribute up to 25% of
compensation, as defined, to these plans. The participants contributions were matched by the Company up to a maximum of 4% of compensation. Under these plans, Company contributions were approximately $5,094,086, $5,014,378, and $4,721,000, in
2002, 2001, and 2000, respectively.



For certain
executives, the Company has a supplemental defined benefits plan providing retirement and death benefits. The plan is unfunded and the net pension liability was $6,963,538 and $6,211,550 at December 31, 2002 and 2001, respectively. All participants
became fully vested with full service credit until age 65. In 2001, the plan was amended to include current executive officers of the Company. Expense under the plan was $766,836, $430,294, and $1,949,000 in 2002, 2001, and 2000, respectively. For
certain former employees who retired prior to December 31, 1993, healthcare and life insurance benefits are provided through insurance companies. In 2001, the plan was amended to cover current executive officers of the Company upon their retirement.



The assumed weighted-average annual rate of
increase in the per capita cost of covered benefits is 11.0% for 2002 and is assumed to decrease gradually to 5.0% for 2008 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts
reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 2002, by $1,205,056 and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for 2002 by $77,000.



The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 6.75% at December 31, 2002 and 7.25% at December 31, 2001.



Net periodic postretirement benefit cost includes the
following components (in thousands):



|                                      |  | 2002 |       |   | 2001 |   | 2000 | 
|------------------------------------- |  | ---- | ----- | - | ---- | - | ---- | 
|Interest cost                         |  | $    | 763   |   |      | $ | 701  | 
|Amortization of transition obligation |  |      | 763   |   |      |   | 763  | 
|Amortization of gain                  |  |      | (363  | ) |      |   | (485 | 
|                                      |  |      |       |   |      |   |      | 
|                                      |  | $    | 1,163 |   |      | $ | 979  | 
|                                      |  |      |       |   |      |   |      | 



F-18



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table sets forth the change in benefit obligation of the Companys unfunded postretirement benefit plan (in thousands):



|                                          |  | 2002 |        |   | 2001 |  
|----------------------------------------- |  | ---- | ------ | - | ---- | -
|Benefit obligation at beginning of year   |  | $    | 11,011 |   |      | $
|Interest cost                             |  |      | 763    |   |      |  
|Benefits paid                             |  |      | (429   | ) |      |  
|Actuarial loss (gain)                     |  |      | 532    |   |      |  
|                                          |  |      |        |   |      |  
|Benefit obligation at end of year         |  | $    | 11,877 |   |      | $
|                                          |  |      |        |   |      |  
|Funded status                             |  | $    | 11,877 |   |      | $
|Unrecognized actuarial (gain)             |  |      | 3,668  |   |      |  
|Unrecognized transition obligation        |  |      | (7,617 | ) |      |  
|                                          |  |      |        |   |      |  
|Accrued postretirement benefit obligation |  | $    | 7,928  |   |      | $
|                                          |  |      |        |   |      |  



The
Company has two defined benefit pension plans covering substantially all full-time employees in Germany. Plan benefits are based on years of service and employee compensation for the last three years of service. The plans are unfunded and benefit
payments are made directly by the Company. Pension expense includes the following components for the fiscal years ending December 31 (in thousands):



|                 |  | 2002 |      |   | 2001 |   |      | 2000 | 
|---------------- |  | ---- | ---- | - | ---- | - | ---- | ---- | 
|Service cost     |  | $    | 263  |   |      | $ | 204  |      | 
|Interest cost    |  |      | 689  |   |      |   | 567  |      | 
|Net amortization |  |      | (162 | ) |      |   | (350 | )    | 
|                 |  |      |      |   |      |   |      |      | 
|Pension expense  |  | $    | 790  |   |      | $ | 421  |      | 
|                 |  |      |      |   |      |   |      |      | 



The
following table sets forth the amounts recognized in the Companys consolidated balance sheets and reconciles the projected benefit obligation from the beginning of the year to the end of the year (in thousands):



|                                                    |  | 2002 |        |   | 2001 |  
|--------------------------------------------------- |  | ---- | ------ | - | ---- | -
|Projected benefit obligation at beginning of year   |  | $    | 8,105  |   |      | $
|Service cost                                        |  |      | 263    |   |      |  
|Interest cost                                       |  |      | 689    |   |      |  
|Benefits paid                                       |  |      | (257   | ) |      |  
|Change in discount rates                            |  |      | 411    |   |      |  
|Exchange rate change                                |  |      | 988    |   |      |  
|                                                    |  |      |        |   |      |  
|Projected benefit obligation at the end of the year |  |      | 10,199 |   |      |  
|Unrecognized net gain (loss)                        |  |      | (370   | ) |      |  
|                                                    |  |      |        |   |      |  
|Pension liability                                   |  | $    | 9,829  |   |      | $
|                                                    |  |      |        |   |      |  



The rate
of increase in future compensation levels used in determining the projected benefit obligations was 2% for December 31, 2002, 2001, and 2000. The discount rate was 6.75% for December 31, 2002, and 7% for December 31, 2001 and 2000.



10.    Common Stockholders Equity



In 2000, the Board of Directors and
stockholders approved an amendment to the amended and restated 1996 Equity Participation Plan increasing the number of authorized shares of common stock to be granted to officers, key employees of the Company, and non-employee members of the Board
of Directors from 3,450,000 to



F-19



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



7,650,000 shares. Options granted under the plan to key employees are generally exercisable in installments over three years starting one
year from the date of grant and expire ten years from the date of grant. Options granted under the plan to non-employee members of the Board of Directors are exercisable in installments over four year periods starting one year from the date of grant
and expire ten years from the date of grant. Options outstanding under acquired plans will maintain the terms under which the options were granted. These terms allow options granted to key employees and non-employee directors to be exercisable in
installments from one to five years starting one year from the date of grant and expire ten years from the date of grant.



The following summarizes options activity:



|                                         |  | Years Ended December 31, |          
|---------------------------------------- |  | ------------------------ | ---------
|                                         |  | 2002                     |          
|Shares under option at beginning of year |  |                          | 4,733,869
|Granted                                  |  |                          | 1,722,355
|Cancelled                                |  |                          | (268,072 
|Exercised                                |  |                          | (680,150 
|                                         |  |                          |          
|Shares under option at end of year       |  |                          | 5,508,002
|                                         |  |                          |          
|Average price of outstanding options     |  | $                        | 14.86    
|                                         |  |                          |          
|Exercisable at end of year               |  |                          | 2,844,726
|                                         |  |                          |          



The
following summarizes information about stock options outstanding as of December 31, 2002:



|                        |  | Weighted-Avg. Remaining Contractual Life |        | Options Outstanding |                              | Options Exercisable
|----------------------- |  | ---------------------------------------- | ------ | ------------------- | ---------------------------- | -------------------
|Range of Exercise Price |  |                                          | Shares |                     | Weighted-Avg. Exercise Price |                    
|$  3.21 to $  7.5625    |  | 4.32                                     |        | 1,145,991           |                              | $                  
|11.10 to   19.85        |  | 7.71                                     |        | 2,873,290           |                              |                    
|20.00 to   32.55        |  | 7.19                                     |        | 1,488,721           |                              |                    
|                        |  |                                          |        |                     |                              |                    
|Totals                  |  | 6.86                                     |        | 5,508,002           |                              | $                  
|                        |  |                                          |        |                     |                              |                    



For
options granted during 2002, 2001, and 2000, the weighted-average fair value at date of grant was $8.48, $13.37, and $6.35 per option, respectively. Assuming that the Company had accounted for its stock-based employee compensations plans using the
alternative fair value method, the Companys pro forma net income would have been $72,151,000, $76,703,000 and $16,275,000 and pro forma dilutive earnings per share would have been $0.74, $0.79, and $0.17 for 2002, 2001, and 2000, respectively.



The fair value of each option grant was
estimated on the date of grant using a Black Scholes option pricing model with the following assumptions for 2002, 2001, and 2000, respectively; risk free interest rates of 3.82%, 5.5%, and 5.5%; expected lives of contracts of 3 to 10 years; and
volatility of 51.0 percent, 52.6 percent, and 52.9 percent.



The Employee Stock Purchase Plan permits eligible employees to purchase common stock at a price equal to 85% of its fair market value at the lesser of the beginning or end of a six-month plan period. During the fiscal year ended
December 31, 2002, the Company sold 328,846 shares under this plan.



During 1998, the Board of Directors authorized the repurchase, at managements discretion, of $20,000,000 of the Companys common stock. Under this program, the Company repurchased 1,424,700 shares at a cost of
$15,330,000 during 1998.



F-20



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Stockholder Rights Plan



During 2000, the Company adopted a stockholder rights plan (Rights Plan). As part of the Rights Plan, the Companys Board of Directors declared a dividend distribution of one preferred stock purchase right
(Right) for each share of the Companys Common Stock outstanding on December 4, 2000 and each new share issued subsequently.



The rights will become exercisable, with certain exceptions, upon the earlier to occur of (i) ten days following the announcement that a
person or group has acquired or obtained the right to acquire beneficial ownership of 15% or more of the Companys Common Stock, or (ii) ten days following the announcement or commencement of a tender offer which would result in a person or
group beneficially owning 15% or more of the Companys Common Stock.



Once exercisable, each Right will entitle its holder to purchase from the Company one one-hundredth of a share of a new series of the Companys Preferred Stock at a price of $75.00. If a person or group (other than
 L.E. Simmons and his affiliates) acquires beneficial ownership of 15% or more of the Companys outstanding Common Stock, each Right, once exercisable and excluding any Rights held by the acquiring person or group, will entitle its holder
to purchase shares of Common Stock of the Company having a market value of two times the then current exercise price of the Right. In addition, if at any time after such an acquisition, the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning power are sold, each outstanding Right, once exercisable and excluding any Rights held by the acquiring person or group, will entitle its holder to purchase shares of
Common Stock of the acquiring company having a market value of two times the then current exercise price of the Right.



Following the acquisition by a person or group of beneficial ownership of 15% or more of the Companys Common Stock and prior to an
acquisition of the Company in a merger or other business combination transaction, a sale of 50% or more of the Companys consolidated assets or earning power or an acquisition of 50% or more of the Common Stock, the Board of Directors may
exchange the Rights (other than rights held by the acquiring person or group), in whole or in part, at an exchange ratio of one share of Common Stock per Right.



Prior to the acquisition by a person or group of beneficial ownership of 15% or more of the Common Stock, the
Rights are subject to redemption at the option of the Board of Directors at a price of $0.01 per Right. The Rights currently trade with the Companys Common Stock, have no voting or dividend rights and expire on December 4, 2010.



11.    Commitments and Contingencies



The Company is subject to legal proceedings for events which
arise in the ordinary course of its business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the results of operations or financial position of the Company.



The Company leases certain facilities and equipment under
operating leases that expire at various dates through 2082. These leases generally contain renewal options and require the lessee to pay maintenance, insurance, taxes and other operating expenses in addition to the minimum annual rentals. Rental
expense related to operating leases approximated $33,305,000, $31,210,000, and $29,159,000 in 2002, 2001, and 2000, respectively.



F-21



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Future
minimum lease commitments under noncancellable operating leases with initial or remaining terms of one year or more at December 31, 2002 are payable as follows (in thousands):



|2003                           |  | $ | 23,341
|------------------------------ |  | - | ------
|2004                           |  |   | 17,178
|2005                           |  |   | 11,527
|2006                           |  |   | 8,176 
|2007                           |  |   | 5,505 
|Thereafter                     |  |   | 22,072
|                               |  |   |       
|Total future lease commitments |  | $ | 87,799
|                               |  |   |       



12.    Business Segments And Foreign Operations



The Company is organized based on the products and services it offers. The Company reorganized into four principal business segments: Drilling Equipment Sales, Tubular Services, Drilling Services, and
Coiled Tubing & Wireline Products.



Drilling Equipment Sales:    This segment manufactures, sells, leases and repairs integrated systems and equipment for rotating and handling pipe on a drilling rig; including conventional drilling rig tools
and equipment, including pipe handling tools, hoisting equipment and rotary equipment, pressure control and motion compensation equipment, and flow devices. This segment also sells after market spare parts and consumables for its drilling systems.
Customers include oil and gas companies and drilling contractors.



Tubular Services:    This segment provides internal coating products and services, inspection and quality assurance services for tubular goods and sucker rods. Additionally, Tubular Services
includes the sale of Fiberglass and composite tubing, and the sale and rental of proprietary equipment used to inspect tubular products at steel mills. Tubular Services also provides technical inspection services and quality assurance services for
in-service pipelines used to transport oil and gas. Customers include major and independent oil and gas companies, national oil companies, drilling and workover contractors, oilfield equipment and product distributors, industrial plant operations,
pipeline operators, and steel mills.



Drilling
Services:    This segment consists of the sale and rental of technical equipment used in, and the provision of services related to, the separation of drill cuttings (solids) from fluids used in the oil and gas drilling
processes, and the sale of computer based drilling information and control systems, as well as conventional drilling rig instrumentation. Customers include major and independent oil and gas companies, national oil companies, and drilling
contractors.



Coiled Tubing & Wireline
Products:    This segment consists of the sale of highly-engineered coiled tubing equipment, pressure control equipment, coiled tubing pipe, pressure pumping, wireline and related tools to companies engaged in providing oil
and gas well drilling, completion and remediation services. Customers include major oil and gas coiled tubing service companies, as well as major oil companies and large independents.



The accounting policies of the segments are the same as those described in Note 2 to the consolidated
financial statements. The Company evaluates the performance of its operating segments at the operating profit level which consists of income before interest expense (income), other expense (income), nonrecurring items and income taxes. Intersegment
sales and transfers are not significant.



F-22



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Summarized
information for the Companys reportable segments is contained in the following table. Other Unallocated includes corporate related expenses and certain goodwill and identified intangible amortization not allocated to product lines. Operating
profit excludes transaction costs of $3,658,000 (2002) associated with the acquisition of substantially all of the oilfield services business of ICO and $2,829,000 (2002) associated with the early termination of certain employment contracts in
conjunction with the 2000 Merger, litigation costs of $16,500,000 (2001), merger and transaction costs of $26,570,000 (2000) associated with the Merger.



|                              |  | Drilling Equipment Sales |         | Tubular Services |   | Drilling Services |  | Coiled Tubing & Wireline Products |         | Other Unallocated |   |         | Total
|----------------------------- |  | ------------------------ | ------- | ---------------- | - | ----------------- |  | --------------------------------- | ------- | ----------------- | - | ------- | -----
|                              |  | (in thousands)          
|2002                          |  |                          |         |                  |   |                   |  |                                   |         |                   |   |         |      
|Revenue                       |  | $                        | 486,695 |                  | $ | 355,966           |  | $                                 | 278,617 |                   | $ | 213,786 |      
|Operating profit              |  |                          | 71,630  |                  |   | 54,405            |  |                                   | 50,476  |                   |   | 39,455  |      
|Total assets                  |  |                          | 388,414 |                  |   | 559,284           |  |                                   | 380,141 |                   |   | 245,411 |      
|Goodwill                      |  |                          | 15,911  |                  |   | 194,011           |  |                                   | 96,800  |                   |   | 111,937 |      
|Capital expenditures          |  |                          | 15,313  |                  |   | 11,717            |  |                                   | 17,987  |                   |   | 2,265   |      
|Depreciation and amortization |  |                          | 13,539  |                  |   | 16,807            |  |                                   | 21,028  |                   |   | 4,277   |      
|                             
|2001                          |  |                          |         |                  |   |                   |  |                                   |         |                   |   |         |      
|Revenue                       |  | $                        | 395,550 |                  | $ | 352,624           |  | $                                 | 314,272 |                   | $ | 205,363 |      
|Operating profit              |  |                          | 39,162  |                  |   | 67,740            |  |                                   | 70,502  |                   |   | 44,902  |      
|Total assets                  |  |                          | 324,741 |                  |   | 404,653           |  |                                   | 403,984 |                   |   | 253,246 |      
|Goodwill                      |  |                          | 15,911  |                  |   | 103,140           |  |                                   | 94,903  |                   |   | 111,171 |      
|Capital expenditures          |  |                          | 13,992  |                  |   | 12,645            |  |                                   | 34,248  |                   |   | 3,408   |      
|Depreciation and amortization |  |                          | 16,168  |                  |   | 15,783            |  |                                   | 21,791  |                   |   | 4,623   |      
|                             
|2000                          |  |                          |         |                  |   |                   |  |                                   |         |                   |   |         |      
|Revenue                       |  | $                        | 283,360 |                  | $ | 248,099           |  | $                                 | 250,229 |                   | $ | 84,927  |      
|Operating profit              |  |                          | 30,193  |                  |   | 39,666            |  |                                   | 39,673  |                   |   | 13,895  |      
|Total assets                  |  |                          | 223,369 |                  |   | 377,980           |  |                                   | 351,243 |                   |   | 106,675 |      
|Goodwill                      |  |                          | 6,238   |                  |   | 108,083           |  |                                   | 85,892  |                   |   | 38,428  |      
|Capital expenditures          |  |                          | 9,750   |                  |   | 11,178            |  |                                   | 22,413  |                   |   | 999     |      
|Depreciation and amortization |  |                          | 14,966  |                  |   | 13,221            |  |                                   | 20,345  |                   |   | 1,722   |      



The
following table represents revenues by country or geographic region based on the location of the use of the product or service:



|               |  | 2002           |           | 2001 |   | 2000     
|-------------- |  | -------------- | --------- | ---- | - | ---------
|               |  | (in thousands)
|U.S.           |  | $              | 579,400   |      | $ | 527,060  
|Canada         |  |                | 90,255    |      |   | 102,817  
|Latin America  |  |                | 135,173   |      |   | 167,253  
|United Kingdom |  |                | 90,229    |      |   | 86,163   
|Other Europe   |  |                | 135,796   |      |   | 153,916  
|Far East       |  |                | 142,618   |      |   | 100,274  
|Other          |  |                | 161,593   |      |   | 130,326  
|               |  |                |           |      |   |          
|Total          |  | $              | 1,335,064 |      | $ | 1,267,809
|               |  |                |           |      |   |          



F-23



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table represents the net book value of property and equipment based on the location of the assets:



|               |  | 2002           |         | 2001 |   | 2000   
|-------------- |  | -------------- | ------- | ---- | - | -------
|               |  | (in thousands)
|U.S.           |  | $              | 264,236 |      | $ | 224,118
|Latin America  |  |                | 45,955  |      |   | 48,468 
|Canada         |  |                | 49,602  |      |   | 43,006 
|United Kingdom |  |                | 47,290  |      |   | 48,226 
|Netherlands    |  |                | 8,535   |      |   | 9,278  
|Other Europe   |  |                | 12,964  |      |   | 12,491 
|Far East       |  |                | 16,827  |      |   | 13,213 
|Middle East    |  |                | 4,722   |      |   | 1,616  
|               |  |                |         |      |   |        
|Total          |  | $              | 450,131 |      | $ | 400,416
|               |  |                |         |      |   |        



13.    CONDENSED CONSOLIDATING FINANCIAL INFORMATION



On November 19, 2002, the Company issued $150 million of 5.5% Senior Notes due 2012 (2012 Notes). The 2012 Notes are fully and unconditionally guaranteed, on a joint and several basis, by
certain direct wholly-owned subsidiaries of the Company. Each of the guarantees is an unsecured obligation of the guarantor and ranks pari passuwith the guarantees provided by and the obligations of such guarantor subsidiaries under the
credit agreement, 2011 Notes, 2008 Notes, and with all existing and future unsecured indebtedness of such guarantor for borrowed money that is not, by its terms, expressly subordinated in right of payment to such guarantee.



On May 1, 2001, the Company issued $200.0 million of 71⁄4%
Senior Notes due 2011 (2011 Notes). The 2011 Notes are fully and unconditionally guaranteed, on a joint and several basis, by certain wholly-owned subsidiaries of the Company. Each of the guarantees is an unsecured obligation of the
guarantor and ranks pari passu with the guarantees provided by and the obligations of such guarantor subsidiaries under the credit facility, the 2012 Notes, the 2008 Notes, and with all existing and future unsecured indebtedness of such
guarantor for borrowed money that is not, by its terms, expressly subordinated in right of payment to such guarantee.



On February 25, 1998, the Company issued $100 million of 71⁄2% Senior Notes due 2008 (2008 Notes). The 2008 Notes are fully and unconditionally guaranteed, on a joint and several basis, by certain
wholly-owned subsidiaries of the Company. Each of the guarantees is an unsecured obligation of the guarantor and rankspari passu with the guarantees provided by and the obligations of such guarantor subsidiaries under the Senior credit
agreement, 2012 Notes and the 2011 Notes, and with all existing and future unsecured indebtedness of such guarantor for borrowed money that is not, by its terms, expressly subordinated in right of payment to such guarantee.



F-24



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following condensed consolidating balance sheets as of December 31, 2002 and 2001 and the related condensed consolidating statements of income and cash flows for each of the three years in the period ended December 31, 2002 should be read in
conjunction with the notes to these consolidated financial statements.



|                                      |  | Year Ended December 31, 2002 |          
|------------------------------------- |  | ---------------------------- | ---------
|                                      |  | Varco International, Inc.    |          
|                                      |  | (In thousands)               |          
|CONDENSED CONSOLIDATING BALANCE SHEET |  |                              |          
|Current assets:                       |  |                              |          
|Cash and cash equivalents             |  | $                            | 4,221    
|Accounts receivable, net              |  |                              | 272,340  
|Inventory, net                        |  |                              |         
|Other current assets                  |  |                              |         
|                                      |  |                              |          
|Total current assets                  |  |                              | 276,561  
|Investment in subsidiaries            |  |                              | 1,228,861
|Property and equipment, net           |  |                              |         
|Identifiable intangibles, net         |  |                              |         
|Goodwill, net                         |  |                              |         
|Other assets, net                     |  |                              | 3,860    
|                                      |  |                              |          
|Total assets                          |  | $                            | 1,509,282
|                                      |  |                              |          
|Current liabilities:                  |  |                              |          
|Accounts payable                      |  | $                            | 118,009  
|Accrued liabilities                   |  |                              | 6,264    
|Income taxes                          |  |                              |         
|Current portion of long-term debt     |  |                              |         
|                                      |  |                              |          
|Total current liabilities             |  |                              | 124,273  
|Long-term debt                        |  |                              | 449,839  
|Pension liabilities                   |  |                              | 14,888   
|Deferred taxes payable                |  |                              |         
|Other liabilities                     |  |                              |         
|                                      |  |                              |          
|Total liabilities                     |  |                              | 589,000  
|Common stock                          |  |                              | 984      
|Paid in capital                       |  |                              | 525,782  
|Retained earnings                     |  |                              | 427,355  
|Cumulative translation adjustment     |  |                              | (18,509  
|Treasury stock                        |  |                              | (15,330  
|                                      |  |                              |          
|Total common stockholders equity     |  |                              | 920,282  
|                                      |  |                              |          
|Total liabilities and equity          |  | $                            | 1,509,282
|                                      |  |                              |          



F-25



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|                                      |  | Year Ended December 31, 2001 |          
|------------------------------------- |  | ---------------------------- | ---------
|                                      |  | Varco International, Inc.    |          
|                                      |  | (In thousands)               |          
|CONDENSED CONSOLIDATING BALANCE SHEET |  |                              |          
|Current assets:                       |  |                              |          
|Cash and cash equivalents             |  | $                            | 5,562    
|Accounts receivable, net              |  |                              | 274,127  
|Inventory, net                        |  |                              |         
|Other current assets                  |  |                              |         
|                                      |  |                              |          
|Total current assets                  |  |                              | 279,689  
|Investment in subsidiaries            |  |                              | 984,501  
|Property and equipment, net           |  |                              |         
|Identifiable intangibles, net         |  |                              |         
|Goodwill, net                         |  |                              |         
|Other assets, net                     |  |                              | 5,420    
|                                      |  |                              |          
|Total assets                          |  | $                            | 1,269,610
|                                      |  |                              |          
|Current liabilities:                  |  |                              |          
|Accounts payable                      |  | $                            | 117,995  
|Accrued liabilities                   |  |                              | 5,255    
|Income taxes                          |  |                              |         
|Current portion of long-term debt     |  |                              |         
|                                      |  |                              |          
|Total current liabilities             |  |                              | 123,250  
|Long-term debt                        |  |                              | 300,642  
|Pension liabilities                   |  |                              | 17,404   
|Deferred taxes payable                |  |                              |         
|Other liabilities                     |  |                              |         
|                                      |  |                              |          
|Total liabilities                     |  |                              | 441,296  
|Common stock                          |  |                              | 974      
|Paid in capital                       |  |                              | 514,137  
|Retained earnings                     |  |                              | 347,548  
|Cumulative translation adjustment     |  |                              | (19,015  
|Treasury stock                        |  |                              | (15,330  
|                                      |  |                              |          
|Total common stockholders equity     |  |                              | 828,314  
|                                      |  |                              |          
|Total liabilities and equity          |  | $                            | 1,269,610
|                                      |  |                              |          



F-26



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|                                            |  | Year Ended December 31, 2002
|------------------------------------------- |  | ----------------------------
|                                            |  | Varco International, Inc.   
|                                            |  | (In thousands)              
|CONDENSED CONSOLIDATING STATEMENT OF INCOME |  |                             
|Revenue                                     |  | $                           
|Cost of sales                               |  |                             
|Selling, general and administrative         |  |                             
|Research and engineering costs              |  |                             
|Merger, transaction, and litigation costs   |  |                             
|                                            |  |                             
|Total costs                                 |  |                             
|                                            |  |                             
|Operating profit                            |  |                             
|Other expenses (income)                     |  |                             
|Interest expense                            |  |                             
|                                            |  |                             
|Income (loss) before income taxes           |  |                             
|Provision for income taxes                  |  |                             
|Equity in net income of subsidiaries        |  |                             
|                                            |  |                             
|Net income                                  |  | $                           
|                                            |  |                             



|                                            |  | Year Ended December 31, 2001
|------------------------------------------- |  | ----------------------------
|                                            |  | Varco International, Inc.   
|                                            |  | (In thousands)              
|CONDENSED CONSOLIDATING STATEMENT OF INCOME |  |                             
|Revenue                                     |  | $                           
|Cost of sales                               |  |                             
|Amortization of goodwill                    |  |                             
|Selling, general and administrative         |  |                             
|Research and engineering costs              |  |                             
|Merger, transaction, and litigation costs   |  |                             
|                                            |  |                             
|Total costs                                 |  |                             
|                                            |  |                             
|Operating profit                            |  |                             
|Other expenses                              |  |                             
|Interest expense                            |  |                             
|                                            |  |                             
|Income (loss) before income taxes           |  |                             
|Provision for income taxes                  |  |                             
|Equity in net income of subsidiaries        |  |                             
|                                            |  |                             
|Net income                                  |  | $                           
|                                            |  |                             



F-27



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                            |  | Year Ended December 31, 2000 |        
|------------------------------------------- |  | ---------------------------- | -------
|                                            |  | Varco International, Inc.    |        
|                                            |  | (In thousands)               |        
|CONDENSED CONSOLIDATING STATEMENT OF INCOME |  |                              |        
|Revenue                                     |  | $                            |       
|Cost of sales                               |  |                              |       
|Amortization of goodwill                    |  |                              |       
|Selling, general and administrative         |  |                              |       
|Research and engineering costs              |  |                              |       
|Merger, transaction, and litigation costs   |  |                              |       
|                                            |  |                              |        
|Total costs                                 |  |                              |       
|                                            |  |                              |        
|Operating profit                            |  |                              |       
|Other expenses (income)                     |  |                              | 5,785  
|Interest expense                            |  |                              | 13,333 
|                                            |  |                              |        
|Income (loss) before income taxes           |  |                              | (19,118
|Provision for income taxes                  |  |                              |       
|Equity in net income of subsidiaries        |  |                              | 40,173 
|                                            |  |                              |        
|Net income                                  |  | $                            | 21,055 
|                                            |  |                              |        



|                                                      |  | Year Ended December 31, 2002 |         
|----------------------------------------------------- |  | ---------------------------- | --------
|                                                      |  | Varco International, Inc.    |         
|                                                      |  | (In thousands)               |         
|CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS       |  |                              |         
|Net cash provided by (used for) operating activities  |  | $                            | (23,041 
|Net cash provided by (used for) investing activities: |  |                              |         
|Capital expenditures                                  |  |                              |        
|Business acquisitions, net of cash acquired           |  |                              |        
|Investments in subsidiaries                           |  |                              | (139,658
|Other                                                 |  |                              |        
|                                                      |  |                              |         
|Net cash provided by (used for) investing activities  |  |                              | (139,658
|Net cash provided by (used for) financing activities: |  |                              |         
|Net borrowings (payments) under financing agreements  |  |                              | 152,201 
|Debt issue costs                                      |  |                              | (1,732  
|Proceeds from cash flow hedge                         |  |                              | 1,346   
|Net proceeds from sale of common stock, net           |  |                              | 9,543   
|                                                      |  |                              |         
|Net cash provided by (used for) financing activities  |  |                              | 161,358 
|Effect of exchange rate changes on cash               |  |                              |        
|Net increase (decrease) in cash and cash equivalents  |  |                              | (1,341  
|Cash and cash equivalents:                            |  |                              |         
|Beginning of period                                   |  |                              | 5,562   
|                                                      |  |                              |         
|End of period                                         |  | $                            | 4,221   
|                                                      |  |                              |         



F-28



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|                                                      |  | Year Ended December 31, 2001 |         
|----------------------------------------------------- |  | ---------------------------- | --------
|                                                      |  | Varco International, Inc.    |         
|                                                      |  | (In thousands)               |         
|CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS       |  |                              |         
|Net cash provided by (used for) operating activities  |  | $                            | (38,262 
|Net cash provided by (used for) investing activities: |  |                              |         
|Capital expenditures                                  |  |                              |        
|Business acquisitions, net of cash acquired           |  |                              |        
|Investments in subsidiaries                           |  |                              | (144,376
|Other                                                 |  |                              |        
|                                                      |  |                              |         
|Net cash provided by (used for) investing activities  |  |                              | (144,376
|Net cash provided by (used for) financing activities: |  |                              |         
|Net payments under financing agreements               |  |                              | 178,068 
|Net proceeds from sale of common stock                |  |                              | 10,132  
|                                                      |  |                              |         
|Net cash provided by (used for) financing activities  |  |                              | 188,200 
|Effect of exchange rate changes on cash               |  |                              |        
|Net increase in cash and cash equivalents             |  |                              | 5,562   
|Cash and cash equivalents:                            |  |                              |         
|Beginning of period                                   |  |                              |        
|                                                      |  |                              |         
|End of period                                         |  | $                            | 5,562   
|                                                      |  |                              |         



|                                                      |  | Year Ended December 31, 2000 |        
|----------------------------------------------------- |  | ---------------------------- | -------
|                                                      |  | Varco International, Inc.    |        
|                                                      |  | (In thousands)               |        
|CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS       |  |                              |        
|Net cash provided by (used for) operating activities  |  | $                            | 55,689 
|Net cash provided by (used for) investing activities: |  |                              |        
|Capital expenditures                                  |  |                              |       
|Business acquisitions, net of cash acquired           |  |                              |       
|Investments in subsidiaries                           |  |                              | 15,262 
|Other                                                 |  |                              |       
|                                                      |  |                              |        
|Net cash provided by (used for) investing activities  |  |                              | 15,262 
|Net cash used for financing activities:               |  |                              |        
|Net payments under financing agreements               |  |                              | (81,000
|Net proceeds from sale of common stock                |  |                              | 10,049 
|                                                      |  |                              |        
|Net cash used for financing activities                |  |                              | (70,951
|Effect of exchange rate changes on cash               |  |                              |       
|Net increase (decrease) in cash and cash equivalents  |  |                              |       
|Cash and cash equivalents:                            |  |                              |        
|Beginning of period                                   |  |                              |       
|                                                      |  |                              |        
|End of period                                         |  | $                            |       
|                                                      |  |                              |        



F-29



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





14.    Quarterly Financial Information (Unaudited)



Summarized quarterly financial information for 2002, 2001, and 2000 is as follows:



|               |  | Revenue                               |           | Operating Profit (Loss) |   |         | Net Income (Loss) |  |   | Basic Earnings (Loss) Per Common Share |   |  | Dilutive Earnings (Loss) Per Common Share |      
|-------------- |  | ------------------------------------- | --------- | ----------------------- | - | ------- | ----------------- |  | - | -------------------------------------- | - |  | ----------------------------------------- | -----
|               |  | (In thousands, except for share data) |          
|2002           |  |                                       |           |                         |   |         |                   |  |   |                                        |   |  |                                           |      
|First Quarter  |  | $                                     | 315,783   |                         | $ | 38,780  |                   |  | $ | 19,162                                 |   |  | $                                         | 0.20 
|Second Quarter |  |                                       | 335,896   |                         |   | 42,615  |                   |  |   | 20,860                                 |   |  |                                           | 0.22 
|Third Quarter  |  |                                       | 329,366   |                         |   | 36,586  |                   |  |   | 18,682                                 |   |  |                                           | 0.19 
|Fourth Quarter |  |                                       | 354,019   |                         |   | 38,084  |                   |  |   | 21,103                                 |   |  |                                           | 0.22 
|               |  |                                       |           |                         |   |         |                   |  |   |                                        |   |  |                                           |      
|Total Year     |  | $                                     | 1,335,064 |                         | $ | 156,065 |                   |  | $ | 79,807                                 |   |  | $                                         | 0.83 
|               |  |                                       |           |                         |   |         |                   |  |   |                                        |   |  |                                           |      
|              
|2001           |  |                                       |           |                         |   |         |                   |  |   |                                        |   |  |                                           |      
|First Quarter  |  | $                                     | 274,213   |                         | $ | 36,644  |                   |  | $ | 19,127                                 |   |  | $                                         | 0.20 
|Second Quarter |  |                                       | 303,875   |                         |   | 25,940  |                   |  |   | 11,747                                 |   |  |                                           | 0.12 
|Third Quarter  |  |                                       | 327,472   |                         |   | 46,334  |                   |  |   | 24,898                                 |   |  |                                           | 0.26 
|Fourth Quarter |  |                                       | 362,249   |                         |   | 49,208  |                   |  |   | 27,196                                 |   |  |                                           | 0.28 
|               |  |                                       |           |                         |   |         |                   |  |   |                                        |   |  |                                           |      
|Total Year     |  | $                                     | 1,267,809 |                         | $ | 158,126 |                   |  | $ | 82,968                                 |   |  | $                                         | 0.87 
|               |  |                                       |           |                         |   |         |                   |  |   |                                        |   |  |                                           |      
|              
|2000           |  |                                       |           |                         |   |         |                   |  |   |                                        |   |  |                                           |      
|First Quarter  |  | $                                     | 203,775   |                         | $ | 18,602  |                   |  | $ | 8,768                                  |   |  | $                                         | 0.10 
|Second Quarter |  |                                       | 205,821   |                         |   | (7,233  | )                 |  |   | (12,593                                | ) |  |                                           | (0.14
|Third Quarter  |  |                                       | 211,393   |                         |   | 21,141  |                   |  |   | 10,815                                 |   |  |                                           | 0.12 
|Fourth Quarter |  |                                       | 245,626   |                         |   | 28,401  |                   |  |   | 14,065                                 |   |  |                                           | 0.15 
|               |  |                                       |           |                         |   |         |                   |  |   |                                        |   |  |                                           |      
|Total Year     |  | $                                     | 866,615   |                         | $ | 60,911  |                   |  | $ | 21,055                                 |   |  | $                                         | 0.23 
|               |  |                                       |           |                         |   |         |                   |  |   |                                        |   |  |                                           |      



During
the first quarter of 2002, the Company incurred reorganization costs of $2,829,000 for early termination of employment agreements for several senior executives arising from the Merger in 2000. The Company recorded transaction costs as a result of
the acquisition of substantially all of the oilfield services business of ICO of $2,369,000 and $1,289,000 in the third and fourth quarters, respectively, of 2002. During the second quarter of 2001, the Company engaged in a court ordered mediation
and as a result recorded a $16,500,000 charge concerning a patent litigation matter, which has subsequently been settled. In connection with the Merger in 2000, the Company incurred $26,570,000 of transaction costs during the following quarters of
2000: $23,596,000 (second quarter), $1,164,000 (third quarter), and $1,810,000 (fourth quarter).



The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), effective January 1, 2002. The effects of not amortizing goodwill
and other intangible assets in periods prior to the adoption of SFAS 142 would have resulted in an increase in quarterly net income of approximately $2.6 million ($.03 per share) in 2001 and approximately $2.1 million ($.02 per share) in 2000.



F-30



---



SCHEDULE I



VARCO INTERNATIONAL, INC.



CONDENSED FINANCIAL INFORMATION OF
REGISTRANT



CONSOLIDATED BALANCE SHEETS

(Parent Company Only)



December 31, 2002 and 2001



|                                                                                                                                                                                                                      |  | December 31, 2002 |           |   | December 31, 2001 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ----------------- | -
|                                                                                                                                                                                                                      |  | (in thousands)    |          
|ASSETS                                                                                                                                                                                                                |  |                   |           |   |                   |  
|Cash and cash equivalents                                                                                                                                                                                             |  | $                 | $4,221    |   |                   | $
|Amounts due from affiliates                                                                                                                                                                                           |  |                   | 272,340   |   |                   |  
|Accounts receivable                                                                                                                                                                                                   |  |                   |          |   |                   |  
|Other assets                                                                                                                                                                                                          |  |                   | 3,860     |   |                   |  
|Investment in subsidiaries                                                                                                                                                                                            |  |                   | 1,228,861 |   |                   |  
|                                                                                                                                                                                                                      |  |                   |           |   |                   |  
|Total assets                                                                                                                                                                                                          |  | $                 | 1,509,282 |   |                   | $
|                                                                                                                                                                                                                      |  |                   |           |   |                   |  
|                                                                                                                                                                                                                     
|LIABILITIES AND EQUITY                                                                                                                                                                                                |  |                   |           |   |                   |  
|Amounts due to affiliates                                                                                                                                                                                             |  | $                 | 118,009   |   |                   | $
|Interest payable                                                                                                                                                                                                      |  |                   | 6,264     |   |                   |  
|Pension liabilities and post retirement obligations                                                                                                                                                                   |  |                   | 14,888    |   |                   |  
|Notes payable                                                                                                                                                                                                         |  |                   | 449,839   |   |                   |  
|                                                                                                                                                                                                                     
|Common stockholders equity:                                                                                                                                                                                          |  |                   |           |   |                   |  
|Common stock, $.01 par value 200,000,000 shares authorized, 98,416,012 shares issued and
96,991,312 shares outstanding at December 31, 2002 (97,402,339 shares issued and 95,977,639 outstanding atDecember 31, 2001) |  |                   | 984       |   |                   |  
|Paid-in capital                                                                                                                                                                                                       |  |                   | 525,782   |   |                   |  
|Retained earnings                                                                                                                                                                                                     |  |                   | 427,355   |   |                   |  
|Accumulated other comprehensive loss                                                                                                                                                                                  |  |                   | (18,509   | ) |                   |  
|Less: treasury stock at cost (1,424,700 shares)                                                                                                                                                                       |  |                   | (15,330   | ) |                   |  
|                                                                                                                                                                                                                      |  |                   |           |   |                   |  
|Total common stockholders equity                                                                                                                                                                                     |  |                   | 920,282   |   |                   |  
|                                                                                                                                                                                                                      |  |                   |           |   |                   |  
|Total liabilities and equity                                                                                                                                                                                          |  | $                 | 1,509,282 |   |                   | $
|                                                                                                                                                                                                                      |  |                   |           |   |                   |  



See notes
to condensed financial statements.



S-1



---



SCHEDULE I



VARCO INTERNATIONAL, INC.



CONDENSED FINANCIAL INFORMATION OF
REGISTRANT



CONDENSED STATEMENTS OF INCOME

(Parent Company Only)



Years ended December 31, 2002, 2001, 2000



|                                       |  | Years Ended December 31, |        
|-------------------------------------- |  | ------------------------ | -------
|                                       |  | 2002                     |        
|                                       |  | (in thousands)           |        
|Equity in net earnings of subsidiaries |  | $                        | 104,702
|Interest expense                       |  |                          | (23,556
|Other                                  |  |                          | (1,339 
|                                       |  |                          |        
|Net income                             |  | $                        | 79,807 
|                                       |  |                          |        



See notes
to condensed financial statements.



S-2



---



SCHEDULE I



VARCO INTERNATIONAL, INC.



CONDENSED FINANCIAL INFORMATION OF
REGISTRANT



CONDENSED STATEMENTS OF CASH
FLOWS

(Parent Company Only)



Years ended December 31, 2002, 2001, 2000



|                                                                                             |  | Years Ended December 31, |         
|-------------------------------------------------------------------------------------------- |  | ------------------------ | --------
|                                                                                             |  | 2002                     |         
|Cash flows from operating activities:                                                        |  |                          |         
|Net income                                                                                   |  | $                        | 79,807  
|Adjustments to reconcile net income to net cash provided by (used for) operating
activities: |  |                          |         
|Equity in net earnings of subsidiaries                                                       |  |                          | (104,702
|Changes in current assets and liabilities:                                                   |  |                          |         
|Accounts receivable                                                                          |  |                          | 1,276   
|Other assets                                                                                 |  |                          | 1,560   
|Pension liabilities and post-retirement obligations                                          |  |                          | (2,516  
|Interest payable                                                                             |  |                          | 1,009   
|Amounts due from (to) affiliates, net                                                        |  |                          | 525     
|                                                                                             |  |                          |         
|Net cash provided by (used for) operating activities                                         |  |                          | (23,041 
|                                                                                             |  |                          |         
|                                                                                            
|Cash flows provided by (used for) investing activities:                                      |  |                          |         
|Investment in subsidiaries                                                                   |  |                          | (139,658
|                                                                                             |  |                          |         
|                                                                                            
|Cash flows provided by (used for) financing activities:                                      |  |                          |         
|Borrowings (payments) under financing agreements, net                                        |  |                          | 149,197 
|Other                                                                                        |  |                          | 2,618   
|Proceeds from sale of common stock                                                           |  |                          | 9,543   
|                                                                                             |  |                          |         
|Net cash provided by (used for) financing activities                                         |  |                          | 161,358 
|                                                                                             |  |                          |         
|Net change in cash and cash equivalents                                                      |  |                          | (1,341  
|Beginning of the year                                                                        |  |                          | 5,562   
|                                                                                             |  |                          |         
|End of year                                                                                  |  | $                        | 4,221   
|                                                                                             |  |                          |         



See notes
to condensed financial statements.



S-3



---



SCHEDULE I



VARCO INTERNATIONAL, INC.



CONDENSED FINANCIAL INFORMATION OF
REGISTRANT



NOTES TO CONDENSED FINANCIAL
STATEMENTS



December 31, 2002, 2001, 2000



For information concerning restrictions
pertaining to the common stock and commitments and contingencies, see Notes 10 and 11 of notes to consolidated financial statements of Varco International, Inc.



S-4



---



SCHEDULE II



VARCO INTERNATIONAL, INC.



VALUATION AND QUALIFYING ACCOUNTS



Years ended December 31, 2002, 2001, 2000



|                                                                      |  | Balance Beginning of Year |        | Additions (Deductions) Charged to Costs and Expenses |   |       | Charge offs and Other |  |   | Balance End of Year
|--------------------------------------------------------------------- |  | ------------------------- | ------ | ---------------------------------------------------- | - | ----- | --------------------- |  | - | -------------------
|                                                                      |  | (in thousands)           
|Allowance for doubtful accounts:                                      |  |                           |        |                                                      |   |       |                       |  |   |                    
|2002                                                                  |  | $                         | 11,517 |                                                      | $ | 2,894 |                       |  | $ | (2,853             
|2001                                                                  |  | $                         | 10,199 |                                                      | $ | 6,326 |                       |  | $ | (5,008             
|2000                                                                  |  | $                         | 8,373  |                                                      | $ | 4,895 |                       |  | $ | (3,069             
|                                                                     
|Allowance for excess and obsolete inventory reserves
(excludes LIFO): |  |                           |        |                                                      |   |       |                       |  |   |                    
|2002                                                                  |  | $                         | 31,028 |                                                      | $ | 7,702 |                       |  | $ | (9,737             
|2001                                                                  |  | $                         | 23,333 |                                                      | $ | 9,507 |                       |  | $ | (1,812             
|2000                                                                  |  | $                         | 26,933 |                                                      | $ | 5,772 |                       |  | $ | (9,372             
|                                                                     
|Valuation allowance for deferred tax assets:                          |  |                           |        |                                                      |   |       |                       |  |   |                    
|2002                                                                  |  | $                         | 913    |                                                      | $ | 1,062 |                       |  | $ |                   
|2001                                                                  |  | $                         | 967    |                                                      | $ |      |                       |  | $ | (54                
|2000                                                                  |  | $                         | 1,238  |                                                      | $ | (271  | )                     |  | $ |                   





S-5