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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
(MARK ONE)
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 (FEE REQUIRED)
 
    FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                      OR
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 (NO FEE REQUIRED)
 
  FOR THE TRANSITION PERIOD FROM       TO
 
                                TUBOSCOPE INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
          DELAWARE                        0-18312                76-0252850
 (STATE OR OTHER JURISDICTION      (COMMISSION FILE NO.)      (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NO.)
    
       
 
  2835 HOLMES ROAD, HOUSTON, TEXAS                        77051
   (ADDRESS OF PRINCIPAL EXECUTIVE                     (ZIP CODE)
              OFFICES)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 799-5100
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
                                     NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                         COMMON STOCK, $.01 PAR VALUE
                               (TITLE OF CLASS)
 
                               ----------------
 
  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 [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 5, 1998, was $1,003,634,538 based on the closing
sales price of such stock on such date.
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of 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. [_]
 
  The number of shares outstanding of the registrant's common stock, as of
February 5, 1998 was 44,237,335.
 
                               ----------------
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the registrant's Proxy Statement for its 1998 Annual Meeting are
incorporated by this reference into Part II and Part III, respectively, as set
forth herein.
 
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<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
  Tuboscope Inc. (the "Company") is a supplier of technical services and
highly-engineered products to the oil and gas drilling, completion,
production, and transmission industries worldwide.
 
  The Company operates through four main product lines in the oil and gas
industry segment. The product lines are: (i) Tubular Services; (ii) Solids
Control Products & Services; (iii) Coiled Tubing & Pressure Control Products;
and (iv) Pipeline & Other Industrial Services. Tubular Services consists of
the provision of internal coating products and services, inspection and
quality assurance services for tubular goods (such as drill pipe, tubing, line
pipe, and casing), and fiberglass tubulars (tubing, casing, and line pipe),
used primarily in oil and gas operations. Additionally, Tubular Services
includes the sale and leasing of proprietary equipment used to inspect tubular
products at steel mills. Solids Control Products & Services 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 oil
and gas drilling processes. Coiled Tubing & Pressure Control Products consists
of the sale of highly-engineered coiled tubing, pressure control, pressure
pumping, wireline, and related tools to companies engaged in providing oil and
gas well drilling, completion and remediation services. Pipeline & Other
Industrial Services consists primarily of the provision of technical
inspection services and quality assurance for in-service pipelines used to
transport oil and gas. Additionally, this product line includes a wide variety
of technical industrial inspection, monitoring, and quality assurance services
provided by the Company for the construction, operation, and maintenance of
major projects in energy-related industries.
 
  The Company is a successor to one of the first companies to provide tubular
inspection services to the oil and gas industry, which commenced operations in
1937. The Company has since grown through a series of mergers and acquisitions
which have added product lines. The Company entered the Solids Control
Products & Services and the Coiled Tubing & Pressure Control Products
businesses on April 24, 1996, when it merged (the "Drexel Merger") with
D.O.S., Ltd. ("Drexel"), the largest provider of solids control services and
coiled tubing equipment worldwide.
 
TUBULAR SERVICES
 
  Tubular Services is the Company's largest business line. It generated
approximately 43%, 51%, and 81% of the Company's revenue for the years ended
December 31, 1997, 1996 and 1995, respectively. The Tubular Services business
generated approximately $225 million in revenue for the year ended December
31, 1997. The Company's Tubular Services operates in the oilfield tubular
markets of 54 countries, in North America, Latin America, Europe, Africa, the
Middle East, and the Far East. The Company provides tubular inspection
services at drilling and workover rig locations, at pipe yards owned by its
customers, at steel mills manufacturing tubular goods, and at facilities which
it owns. The Company provides for the internal coating of tubular goods at ten
plants worldwide and through licensees in certain locations. The Company
entered the fiberglass tubular market on March 7, 1997, with its acquisition
of Fiber Glass Systems, Inc. ("Fiber Glass Systems"), which manufactures
fiberglass tubulars at plants in San Antonio, Texas and Big Spring, Texas.
 
  Demand for Tubular Services products depends upon the activity level of
drilling, well remediation, and flowline installation operation activity in
the oil and gas industry. The Company's customers rely on tubular inspection
services to avoid failure of in-service tubing, casing, flowlines, 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 their fiber glass
tubulars in lieu of conventional steel tubulars, due to the corrosion
resistant properties of fiber glass. Tubular inspection and coating services,
and fiberglass tubulars, 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
 
                                       2
<PAGE>
 
reputation, experience, technology of products offered, reliability and price.
The Company believes it is the largest provider of tubular inspection and the
largest provider of internal tubular coating services worldwide. The Company
believes it is the second largest provider of fiberglass tubulars to oilfield
applications worldwide.
 
  Tubular Corrosion Control. The Company develops, manufactures and applies
its proprietary tubular coatings, known as Tube-Kote(R) 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 service and production for oil and gas
producers. In addition, coatings are designed to increase the fluid flow
through tubulars by decreasing or eliminating paraffin and scale buildup,
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.
 
  The Company has a long history of introducing new coating products custom-
engineered to address increasingly corrosive environments encountered in oil
and gas drilling and production operations. 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.
 
  On March 7, 1997, the Company acquired Fiber Glass Systems, a leading
provider of high pressure fiberglass tubulars used in oilfield applications,
for a combination of stock and cash. Fiber Glass Systems has manufactured
fiberglass pipe since 1968 under the name "Star(R)," and was the first
manufacturer of high-pressure fiberglass pipe to be licensed by the API in
1992. Like coated tubulars, fiberglass pipe is used to guard against corrosive
fluids produced in the oilfield. The acquisition added a new product to the
Company's corrosion control products.
 
  Tubular Inspection. Newly manufactured pipe sometimes contains serious
defects that are not detected by 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 and completion 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 Company'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 Company 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 and 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 July 1997, Tuboscope began offering hydrostatic testing of tubular
connections when it acquired substantially all of the operating assets of
Gator Hawk, Inc. ("Gator Hawk"). The Company offers a proprietary external
measurement, the Iso-Gator(R) service at the rig site as strings of tubulars
are assembled on critical or high-pressure wells.
 
  In August 1997, the Company improved its market position in Canada by
acquiring Cut-Rite Tubular Services, Ltd., a provider of tubular inspection,
repair and cleaning services. Also, in September 1997, the Company
strengthened its market position in Norway by acquiring the tubular inspection
division of Pro Serv AS, a provider of tubular inspection services.
 
                                       3
<PAGE>
 
  In addition to its new and used tubular inspection and reclamation services,
the Company also offers a comprehensive proprietary tubular inventory
management system (TDS(TM)) which permits the real-time tracking of customer's
tubular inventories within the Company's facilities. The system permits
customers to dial-in to monitor tubular inspection and coating progress.
 
  In 1996, the Company installed its first proprietary high-speed full body
ultrasonic tubular inspection unit (TruScope(R)). The new service provides
100% ultrasonic coverage of tubulars at a rate of up to 200 feet per minute.
The first commercial TruScope unit was installed in 1997.
 
  Mill Systems and Sales. The Company engineers and fabricates inspection
equipment for steel mills, which it sells and leases. The equipment is
operated by the steel mills and is used for quality control purposes to detect
transverse, longitudinal and three-dimensional 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 facility. In 1996, the Company moved its NDT division manufacturing
facilities from Midland, Texas to Houston to improve overall manufacturing
efficiency and reduce the cost of manufacturing products. 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.
 
  The Company's Tubular Services customers include almost all major oil and
gas companies, large and small independent producers, national oil companies,
drilling contractors, oilfield supply stores, and steel mills. No single
customer accounted for more than 10% of the Company's revenue in 1997. The
Company's competitors in Tubular Services include ICO Inc., Ameron, A.O.
Smith, Shaw Industries, and Shield Coat Inc. In addition the Company 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 the Company operates have adopted policies or
regulations which may give local nationals in these countries certain
competitive advantages. In tubular coating certain substitutes such as non-
metallic tubulars, inhibitors, corrosion resistant alloys, cathodic protection
systems, and non-metallic liners systems also compete with the Company's
products.
 
SOLIDS CONTROL PRODUCTS & SERVICES
 
  The Company generated approximately 30% of its revenue for the year ended
December 31, 1997 from Solids Control Products & Services. The Solids Control
Products & Services business generated approximately $155 million in revenue
for the year ended December 31, 1997. The Company's Solids Control Products &
Services business serves oilfield drilling markets in North America, Latin
America, Europe, Africa, the Middle East and the Far East.
 
  Solids control is the application of highly-engineered products and services
to extract drill cuttings from fluids used in oil and gas drilling operations.
The removal of drill cuttings is required to permit the reuse of expensive
drilling fluids. By removing rock cuttings and other solid contaminants from
the fluids used in drilling operations, solids control equipment reduces the
volume of drilling fluids and solids which must be disposed of subsequent to
drilling operations (which minimizes the environmental impact of the drilling
operation and reduces post-drilling reclamation costs). Efficient separation
of rock cuttings also reduces the volume of drilling fluids consumed by the
operation, further reducing drilling costs. Effective solids control also
reduces the probability of sticking and losing expensive downhole drilling
equipment in the wellbore and the resulting need to redrill the well. Solids
control technology improves the efficiency of the drilling process by
preventing the recirculation and subsequent recutting of solids at the drill
bit and by reducing wear on mechanical components such as mud pumps and mud
motors.
 
                                       4
<PAGE>
 
  The Company believes the regulatory and industry trend towards minimizing
the environmental impact of drilling operations in a number of environmentally
sensitive oil and gas productive regions will lead to higher demand for highly
engineered solids control products and closed loop drilling systems. 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.
 
  The Company believes it is the world's leading manufacturer and provider of
solids control equipment and services to the oil and natural gas drilling
industry. The Company manufactures conventional and linear motion shale
shakers, high speed and conventional centrifuges, desanders, desilters,
screens, degassers and closed loop drilling fluids systems at its facilities
in Conroe, Texas and Dundee, United Kingdom. The Company markets solids
control equipment under the Brandt(R) and various other brand names. For the
year ended December 31, 1997, approximately 44% of the Company's solids
control equipment revenue was generated from the sale of solids control
equipment and inventory, and approximately 56% of such revenue was generated
from rentals and services.
 
  The Company's customers for Solids Control Products & Services include
almost all major oil and gas companies, large and small independent producers,
national oil companies, and drilling contractors. No single customer accounted
for more than 10% of the Company's revenue in 1997. Competitors in oilfield
solids control equipment and services include Smith International ("SWACO"),
Derrick Manufacturing Corp. and a number of regional competitors. The Company
acquired six regional competitors in solids control in 1997 in order to
enhance its manufacturing and refurbishing capacity, achieve consolidation
savings, strengthen its presence in Canada and expand its product lines. The
Company's solids control equipment is sold or rented in highly competitive
markets. Management believes that on-site service is becoming an increasingly
important competitive element in the solids control equipment market.
Management believes that, in addition to on-site services, the principal
competitive factors affecting its solids control equipment business are
performance, quality, reputation, customer service, product availability,
breadth of product line and price. Management believes market conditions are
generally improving in solids control due to strong demand by oil and gas
drillers to reduce overall drilling costs and minimize environmental impact,
and rising levels of technology required to serve the market.
 
COILED TUBING & PRESSURE CONTROL PRODUCTS
 
  The Company believes it is the world's leading designer and manufacturer of
coiled tubing equipment and coiled tubing pressure control equipment used in
oil and gas well remediation, completion and drilling operations. This product
line generated approximately 16% of the Company's revenue for the year ended
December 31, 1997. The Coiled Tubing & Pressure Control Products segment
generated approximately $83 million in revenue for the year ended December 31,
1997. The Company's Coiled Tubing & Pressure Control Products line sells
capital equipment and consumables to all the major oilfield coiled tubing
remediation and drilling service providers.
 
  Coiled tubing consists of flexible steel tubing manufactured in a continuous
string and wrapped on a spool. It can extend several thousand feet in length
and is run in and out of the well bore 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 and consists of a hydraulically operated tubing
reel or drum, an injector head which pushes or pulls the tubing in or out of
the well bore, 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 Company 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 drillpipe 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 well bore. In addition, the
small size of the coiled
 
                                       5
<PAGE>
 
tubing unit compared to an average workover 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/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 well is "shut in."
 
  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 coiled tubing strings have resulted
in increased uses and applications for coiled tubing products. For example,
well operators are increasingly finding uses for coiled tubing in drilling
applications such as slim hole reentries of existing wells. The Company
engineered and manufactured the first three coiled tubing units built
specifically for coiled tubing drilling in 1996, and delivered two more in
1997.
 
  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 the coiled tubing
is pushing becomes too great or if the tube becomes inhibited by some obstacle
or irregularity in the well bore. 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 the result of the availability of stronger and
larger diameter coiled tubing.
 
  Generally, the Company supplies customers with the equipment and components
necessary to use coiled tubing, which the customers typically purchase
separately. The Company's coiled tubing product line consists of coiled tubing
units, coiled tubing injector heads, coiled tubing and wireline pressure
control equipment, pressure pumper equipment, snubbing units, nitrogen pumping
equipment and cementing, stimulation, and blending equipment. The Company
markets its coiled tubing equipment under the Hydra Rig(R) 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 Company markets
coiled tubing pressure control equipment under the Texas Oil Tools(R) brand
name and manufactures such equipment at its facility in Conroe, Texas and to a
lesser extent at the Dundee facility in the United Kingdom. Through its
September 1996 acquisitions of SSR (International) Ltd. and Pressure Control
Engineering Ltd., the Company entered the wireline unit manufacturing
business, and greatly expanded its offering of downhole coiled tubing tools.
Many coiled tubing customers also purchase and operate wireline units.
Additionally, the Company began offering cementing equipment and fabricating
nitrogen pumping units in Tulsa, Oklahoma, in December 1997, when it acquired
Tulsa Equipment Manufacturing Company.
 
  The Company's coiled tubing product offering includes a wide variety of
sophisticated downhole tools engineered to enable oil and gas producers to re-
enter complex multilateral wells, to install coiled tubing velocity strings,
to bypass electrical submersible pumps, and to perform a variety of other
remediation and completion activities utilizing coiled tubing. One such
product, the MLR(TM) system, was awarded a Meritorious Award for Engineering
Innovation at the 1996 Offshore Technology Conference in Houston, Texas.
Management believes that high-productivity multilateral drilling will continue
to grow.
 
  The Company's customers for Coiled Tubing & Pressure Control Products
include almost all major oil and gas coiled tubing service companies, as well
as major oil companies and large independents. No single customer accounted
for more than 10% of the Company's revenue in 1997. Competitors in Coiled
Tubing & Pressure Control Products include Stewart & Stevenson, National
Oilwell, Elmar, Eastern Oil Tools, and a few smaller competitors. Management
believes market conditions are generally improving in the coiled tubing
equipment market due to growing widespread acceptance of the technology, and
growth in the number of oilfield applications such as coiled tubing drilling.
 
                                       6
<PAGE>
 
PIPELINE & OTHER INDUSTRIAL SERVICES
 
  Pipeline & Other Industrial Services generated approximately 11%, 12%, and
19%, of the Company's revenue for the years ended December 31, 1997, 1996 and
1995, respectively. Pipeline & Other Industrial Services generated
approximately $61 million in revenue for the year ended December 31, 1997. The
Company's Pipeline & Other Industrial Services provides a wide variety of
industrial inspection services, including in-place inspection services of oil
and gas transmission pipelines, and technical industrial inspection,
monitoring, and quality assurance services for the construction, operation,
and maintenance of major projects in energy-related industries.
 
  Pipeline Services. In-place inspection services for oil and gas pipelines
identifies defects in the pipelines without removing or dismantling the
pipelines or disrupting the product flow, giving customers a convenient and
cost-effective method of identifying defects in pipelines. The Company
inspects pipelines by launching a sophisticated survey instrument into the
pipeline. Propelled by the product flow, the instrument uses electromagnetics
and digital and analog recording devices to monitor the severity and location
of internal and external pitting-type corrosion as well as defects 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 there are growth opportunities for the Company's
Pipeline Services due to the aging of the worldwide pipeline network and new
pipeline construction. 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. Additionally, management believes that the Linalog(R) Plus
technology and the Company's new digital TruRes(R) inspection technology will
provide growth opportunities. The Linalog(R) Plus service is a computer
enhanced method for presenting the inspection report produced by the Company's
traditional Linalog(R) technology. The TruRes(R) 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.
 
  Industrial Inspection Services. The Company provides industrial inspection
and monitoring services for the construction, operation and maintenance of
major projects in energy-related industries. Inspection techniques include the
x-raying of pipeline girth welds and ultrasonic or eddy current inspection of
refinery equipment. Monitoring services include various quality assurance and
control and supervision services. Most of these services are provided during
fabrication, installation and maintenance of energy-related facilities. The
primary customers are power plants undergoing construction or maintenance,
chemical and petrochemical plants, pipeline construction companies and
pipeline owners.
 
  The Company's Pipeline & Other Industrial Services customers include most
major pipeline operators, national oil and gas companies, and various nuclear
power plant operators. No customer accounted for more than 10 percent of
revenues for the Company in 1997. The Company's primary competitors include
Pipeline Integrity International, a subsidiary of British Gas Plc; Pipetronix
GmbH, a subsidiary of Preussag Ag; and H. Rosen Engineering GmbH, and BJ
Services. 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 of survey results interpretation.
 
                                       7
<PAGE>
 
1997 ACQUISITIONS
 
  In 1997, Tuboscope made the following acquisitions:
 
<TABLE>
<CAPTION>
                                                                            DATE OF
                  ACQUIRED ENTITY                 PRODUCT LINE              ACQUISITION
                  ---------------                 ------------              -----------
   <S>                                            <C>                       <C>
   Fiber Glass Systems, Inc. ..............       Tubular Services          March 1997
   South-West Centrifuge Services, Inc. ........  Solids Control            July 1997
   Gator Hawk, Inc. ............................  Tubular Services          July 1997
   Chargewood Limited, Enaco Plc, and Pump
    Systems Limited together with certain assets
    owned by their shareholders.................  Solids Control            August 1997
   Fisher Fluids Processing, Inc................  Solids Control            August 1997
   Cut-Rite Tubular Services, Ltd. .............  Tubular Services          August 1997
   Operating assets of Blackfire Oil Inc. ......  Solids Control            September 1997
   Pro Serv AS..................................  Tubular Services          September 1997
   Nu-Tec, Inc.'s Solids Control Division.......  Solids Control            December 1997
   WMCO Instruments, Inc. and WMCO
    Equipment, Inc. ............................  Solids Control            December 1997
   Tulsa Equipment Manufacturing Company, Inc. .  Coiled Tubing and
                                                  Pressure Control Products December 1997
</TABLE>
 
SEASONAL NATURE OF THE COMPANY'S BUSINESS
 
  Historically, the level of the Company's business has followed seasonal
trends, which are described below. However, the historical trends in Tubular
Services and Solids Control Products & Services can also be subject to
significant changes resulting from fluctuations in oil prices and changes in
rig count.
 
  The Company's tubular inspection, tubular coating, and solids control
businesses in the United States tend to realize lower activity levels during
the first quarter of the calendar year due to the typical delay in the
approval of drilling budgets and weather restrictions. The Company's tubular
inspection, tubular coating, and solids control businesses in Canada typically
realize a strong first quarter of the calendar year as operators take
advantage of the winter freeze to help gain access to drilling and production
areas, and then declines during the second quarter of the calendar year due to
weather conditions which result in road bans that curtail drilling activity.
Tubular Services activity in both the United States and Canada typically
increases during the third quarter of the calendar year and then peaks in the
fourth quarter of the calendar year as operators authorize the spending of
remaining drilling and/or production capital budgets for the year. The
seasonal trend in North America is somewhat offset by the increased activity
level in Latin America during the first quarter of each year.
 
  Pipeline inspection typically experiences 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
maintenance/inspection programs result in less opportunity to perform pipeline
inspection during this time. During the second quarter of the calendar year,
activity begins to increase and normally continues at relatively stable levels
through the end of the year as operators finish scheduled maintenance
programs. Mill systems sales and industrial inspection services have 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, the Coiled Tubing and Pressure Control line has 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.
 
                                       8
<PAGE>
 
MARKETING & DISTRIBUTION NETWORK
 
  The Company's products are marketed through a sales organization and a
network of agents and distributors which spans 54 countries. The Company's
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 service often
are incorporated as a part of a tubular package sold by tubular supply stores
to end users. The Company primarily has direct operations in the international
marketplace, but operates through agents in certain markets.
 
  The Company's Solids Control customers are predominantly oil and natural gas
producers and rig operators. The Company operates sales and distribution
facilities at strategic locations worldwide to service areas with intensive
drilling activity. The Company's worldwide employee Solids Control sales
organization is complemented by service and engineering facilities which
provide specialty repair and maintenance services to existing customers.
 
  The Company's Coiled Tubing & Pressure Control Products primarily are sold
directly to end users through a worldwide employee Coiled Tubing & Pressure
Control Products sales organization. The Company also has in place certain
exclusive alliances with major oilfield service companies to provide pressure
control equipment.
 
  The Company's Pipeline Services customers are primarily major oil and gas
transmission companies and national oil companies in various countries around
the world. The Company sells its services worldwide through a network of sales
employees and agency agreements.
 
PATENTS, LICENSES AND TRADEMARKS
 
  Management believes that the Company's strong market position in its major
businesses is enhanced by its leading technologies and reputation for
innovation and expertise. Through an internal development program and certain
acquisitions, the Company has assembled an extensive array of coiled tubing,
solids control, tubular coating, tubular inspection, mill systems, and
pipeline inspection technologies protected by a substantial number of trade
and service marks, patents, trade secrets, and other proprietary rights.
 
  In 1996, the Company engineered, manufactured, and delivered the first three
coiled tubing units designed specifically to drill wells. In 1997 the Company
manufactured and delivered two more such coiled tubing units designed for
drilling. The Company continues to invest in technology to improve and expand
coiled tubing drilling, and holds a number of patents in both coiled tubing
drilling and conventional coiled tubing unit designs. Additionally, the
Company holds a number of patents related to the manufacture and design of
pressure control equipment. The Company has joint development agreements for
the proprietary SAFECONN(TM) connector system which permits the safe
deployment of long perforating guns into live wells. The Company, through its
Pressure Control Engineering subsidiary, also offers a wide array of coiled
tubing completion and fishing tools, including its patented multi-lateral
reentry (MLR(TM)) system, its StiffLine 2000(TM) coiled tubing velocity string
wellhead hanger system, its HAPPI(TM) coiled tubing hydraulic anchor push-pull
intensifier. The Company has a wide complement of patented blow out preventors
and ancillary equipment for coiled tubing.
 
  The Company's Solids Control Products & Services engineers and assembles
linear motion shakers, combination linear motion/scalping shakers and various
centrifuge designs. Additionally, various styles of screens for use with
shakers are designed by the Company for specialized use in the separation of
drill cuttings from fluids used in oil and gas drilling operations. The
Company has various patents related to its screens and shale shakers in both
the U.S. and international locations. During 1997, the Company acquired the
proprietary Gumbo Box(TM) and related Solids Control products of Nu-Tec, and
the proprietary Accu-Scan(TM) automated rig instrumentation service of WMCO.
The Gumbo Box(TM) removes certain sticky shales from drilling fluids, and the
Accu-Scan(TM) monitors drilling fluid levels, mud gas, and makes other
important measurements related to drilling operations.
 
  The Company and its recent acquisition Vetco Pipeline Services pioneered the
pipeline inspection process with what is now known as "conventional pipeline"
inspection technology. The Company's copyrighted Linalog(R) technology plus
computer enhancement technique adds the ability to integrate computer analysis
into the conventional technology.
 
                                       9
<PAGE>
 
  The Company's Tru Res(R) technology employs a patented state of the art high
resolution inspection tool and next generation magnetic flux leakage
technology to provide enhanced defect characterization.
 
  The Company's electromagnetic inspection system, known as Amalog(R) IV,
performs four separate inspections in one semi-automated process: the
Sonoscope(R) section detects transverse defects, which are flaws aligned
across the pipe; the Amalog(R) section detects flaws with longitudinal
dimensions; the Isolog(R) section detects variations in the thickness of the
wall of the pipe; and the grade verifier section compares each length with a
standard to determine whether all the pipe is of the same metallurgical grade.
In addition, the Company's PipeImage(TM) System for electromagnetic inspection
system uses small sensors, digital signal processing, computer interpretation
and three-dimensional image presentation to help identify flaws in mid-range
walled pipe which may be undetectable with conventional electromagnetic
inspection services.
 
  The equipment and technology used in the Company's ultrasonic inspection
systems (U-Tron(R), SOS Ultrasonic Inspection Unit, Vetcoscan(R) and NDT(TM)
Eagle) is designed to inspect heavywall or non-magnetic tubing, casing and
line pipe for manufacturing defects, where the effectiveness of
electromagnetic inspection is limited. The Company's ultrasonic capabilities
were further enhanced with the introduction of its Endsonic(R) technology for
ultrasonic end area inspection in 1994, and its patented full body ultrasonic
inspection unit (Truscope(R)) which provides 100% ultrasonic coverage at a
rate of 200 feet per minute.
 
  As part of the Vetco Services acquisition, the Company acquired the
interests of Baker Hughes Incorporated ("BHI") in substantially all of the
foreign and domestic trademarks and patents and other proprietary technology
used in the Vetco Services business (other than Vetcoscan(R)). These
technologies include Vetcolog(R), PipeImage(TM) and Vetcoscope(R)
electromagnetic inspection systems and the end area inspection system and all
of the liquid and powder coating technology. In addition, the Company obtained
certain rights to use the Vetcoscan(R) ultrasonic inspection technology
outside the United States. In connection with such acquisition, BHI's domestic
coating and inspection business retained the right to use such technology in
the United States. ICO, Inc. acquired the domestic inspection and coating
business of BHI in September 1992. In 1993 the Company introduced its
WellChek(R) technology which inspects pipe on the rig floor as it is "tripped"
from the well. High demand for the WellChek(R) service prompted Tuboscope to
expand its fleet of these units by 42% during 1997. The Gator Hawk acquisition
provided the Company with the patented Iso-Gator(R) hydrostatic tubular
connection testing service, which is performed at the rig site to ensure
tubing strings are made up properly.
 
  As part of the Company's tubular coating services, the Company develops,
manufactures and applies its proprietary tubular coatings, known as Tube-
Kote(R) coatings, to new and used tubulars. Tube-Kote(R) coatings are
manufactured by and for the Company using a variety of resins, including
phenolic, epoxy or urethane, each selected for its suitability under certain
corrosive conditions and then formulated to enhance performance. Presently the
Company utilizes both thermoplastic and thermosetting plastics technology to
provide materials with enhanced chemical resistance or mechanical properties
to meet the end users field requirements. Every coating is tested and
evaluated in field conditions before being released for customer use. Tube-
Kote(R) coatings are developed and manufactured either at the Company's
Houston, Texas, facility or are manufactured in North America or Europe
through restricted sales agreements with third party manufacturers.
 
  The Company also offers a complete line of connection services for
internally coated pipe. These include Thru-Kote(R) and Thru-Kote(R) U.B.
systems for welding coated line pipe, and a variety of other specialized
fittings. Additionally, the Company's TK(R)-tubing insert is a cost effective
solution for corrosive down hole environments.
 
  The Company has proprietary rights to a number of foreign and domestic
trademarks and service marks important to its business. It also owns various
foreign and domestic patents related to the design and manufacture of certain
products. Many of the patents have expired or will soon expire, and many of
the trademark registrations are up for renewal within the next two years.
Management intends to renew these trademarks. Although management believes
that no single patent is material to the business of the Company, it continues
to seek new patents to protect the Company's proprietary interests in certain
products as necessary.
 
                                      10
<PAGE>
 
ENGINEERING AND MANUFACTURING
 
  The Company manufactures or assembles the equipment and products which it
leases and sells to customers, and which it uses in providing solids control,
inspection, tubular coating, and pipeline inspection services. In addition to
producing new equipment and products, the Company produces spare parts for its
equipment and for resale, and renovates and repairs equipment at its
manufacturing facilities in Houston, Texas; Conroe, Texas; Dundee, Scotland;
and Montrose, Scotland. The Company manufactures screens used in its solids
control operations and for sale to others at its New Iberia, Louisiana;
Conroe, Texas; Leduc, Alberta; and Trinidad facilities. The Company
manufactures coiled tubing units, wireline units, pressure pumping equipment
and pressure control equipment at its Fort Worth, Texas; Conroe, Texas; Tulsa,
Oklahoma; Montrose, Scotland; Aberdeen, Scotland; and Poole, England
facilities. The Company, through its 1997 acquisition of Fiber Glass Systems,
manufactures fiber glass tubulars and fittings at its San Antonio, Texas and
Big Springs, Texas facilities. The Company manufactures its tubular coatings
in its Houston, Texas facility, or through restricted sale agreements with
third party manufacturers.
 
  The equipment and products designed and manufactured by the Company range
from electromagnetic and ultrasonic inspection systems, coating products,
electromagnetic pipeline inspection tools, mechanical solids control
equipment, coiled tubing and wireline equipment, pressure pumping equipment,
pressure control equipment, and downhole coiled tubing tools. Design and
engineering are based on research and development efforts as well as
established customer and industry standards.
 
  Certain of the Company's manufacturing facilities and certain of the
Company's products have various certification, 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
 
  The Company's backlog is based upon anticipated revenues from customer
orders that the Company believes are firm and scheduled for shipment within
twelve months. The level of backlog at any particular time is not necessarily
indicative of the future operating performance of the Company, and orders may
be changed at any time. As of December 31, 1997, the Company's backlog of
Coiled Tubing & Pressure Control Products was $42.1 million, an increase of
approximately 92% above the $21.9 million in backlog as of December 31, 1996.
Backlog amounts in the Company's other product lines are not meaningful
indicators of future business.
 
ENVIRONMENTAL MATTERS
 
  The Company's 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 use of mineral spirits to clean
pipe threads during the tubular inspection process and from the coating
process and the handling of drilling fluids 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, the Nuclear Regulatory Commission and the United States
Department of Transportation. 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.
 
                                      11
<PAGE>
 
  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.
 
  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 "Business--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
 
  As of December 31, 1997, the Company employed 4,598 full-time employees
worldwide, of whom approximately 2,626 were employed in North America. The
Company considers its relations with its employees to be excellent.
 
 
                                      12
<PAGE>
 
ITEM 2. PROPERTIES
 
  The following is a description of the Company's major facilities:
 
<TABLE>
<CAPTION>
                                                                  SIZE
                                                              (APPROXIMATE
       LOCATION                     DESCRIPTION               SQUARE FEET)    OWNED/LEASED
       --------                     -----------             ---------------  ---------------
<S>                      <C>                                <C>              <C>
DOMESTIC:
Bakersfield, California  Reclamation Facility               7,200 on 6       Owned
                                                            Acres
Ventura, California      Gator Hawk Complex: Service        2,960 on .25     Leased
                         Facility                           Acres
Amelia, Louisiana        Coating Plant, Pipe Inspection     85,000 on 35     Building Owned*
                         and Storage Facilities             Acres
Harvey, Louisiana        Coating Plant and Inspection       53,000 on 7      Owned & Leased
                         Facility                           Acres
Lafayette, Louisiana     Highway 90 East Complex: Service   12,075 on .98    Owned
                         Facility, Warehouse,               Acres
                         Administrative Offices, &
                         Regional Office
                         Solids Control Office &            7,500 on .98     Leased
                         Laboratory facility                Acres
Lake Arthur, Louisiana   Solids Control Service & Rework    7,800 on .5      Leased
                         Facility                           Acres
Lake Charles, Louisiana  Solids Control Office &            12,000 on 2      Leased
                         Manufacturing facility             Acres
Morgan City, Louisiana   Inspection Facility                42,400 on 3      Building Owned*
                                                            Acres
New Iberia, Louisiana    Manufacturing and Warehouse        25,500 on 3.4    Owned
                         Facility                           Acres
New Orleans, Louisiana   Solids Control Office & Service    6,000 on .5      Leased
                         facility                           Acre
St. Martinsville,        Solids Control Office & Service    4,000 on 1.0     Owned
 Louisiana               facility                           Acres
Edmond, Oklahoma         Coating Plant                      40,000 on 19     Owned
                                                            Acres
Oklahoma City, Oklahoma  Inspection Facility                6,000 on 5       Owned
                                                            Acres
Tulsa, Oklahoma          Nitrogen Units & Deukly Pump       40,700 on 4.47   Leased
                         Manufacturing Facility, Warehouse  Acres
                         & Offices
Big Spring, Texas        Fiberglass Tubular Manufacturing   39,000 on 12     Owned
                         Plant, Administrative Offices      Acres
Conroe, Texas            Solids Control and Pressure        125,000 on       Owned
                         Control Manufacturing Facility,    30.49 Acres
                         Warehouse, Sales and
                         Administrative Offices, &
                         Engineering
Corpus Christi, Texas    Service Facility                   20,800 on 4      Owned
                                                            Acres
Fort Worth, Texas        Coiled Tubing Manufacturing        75,200 on 9.67   Owned
                         Facility, Warehouse & Offices      Acres
                         Fabrication Center                 26,700 on 1.6    Leased
                                                            Acres
Houston, Texas           Holmes Road Complex:               300,000 on 50    Owned
                         Manufacturing, Warehouse,          Acres
                         Corporate Offices, Coating
                         Manufacturing Plant & Pipeline
                         Services
                         Engineering/Technical Research     76,000 on 6      Owned
                         Center                             Acres
                         Highway 90: Coating Plant          83,000 on 43     Leased
                                                            Acres
                         Sheldon Road Complex: Region       137,000 on 94    Land Owned **
                         Administration Offices, Pipe       Acres            Building Leased
                         Inspection and Storage Facilities
                         SOS Inspection Facility            32,000 on 31     Owned
                                                            Acres
                         Brandt/Southwest Complex:          40,700 on 4.47   Leased
                         Manufacturing & Remanufacturing    Acres
                         Facility, Administration and
                         Sales Office
                         Hardy Road Complex: Facility,      20,000 on 14     Owned
                         Manufacturing, Warehouse,          Acres
                         Administrative Offices,
                         Engineering
Midland, Texas           Coating Plant, Reclamation         87,000 on 25     Owned
                         Facility and Technical Service     Acres
                         Building
</TABLE>
 
                                       13
<PAGE>
 
<TABLE>
<CAPTION>
                                                                   SIZE
                                                               (APPROXIMATE
        LOCATION                     DESCRIPTION               SQUARE FEET)    OWNED/LEASED
        --------                     -----------             ---------------  ---------------
<S>                       <C>                                <C>              <C>
Odessa, Texas             Inspection Pipe Storage Yard and   12,000 on 23.2   Leased
                          Ancillary Service Facility         Acres
San Antonio Texas         Manufacturing Plant, R & D Lab,    62,129 on 19.57  Owned
                          Administrative Offices             Acres
Casper, Wyoming           Inspection Facility                91,720 on 29     Owned
                                                             Acres
North Slope (Deadhorse),  Inspection, Repair and Service     18,400           Building Owned*
 Alaska                   Center
Kenai, Alaska             Inspection Facility                9,100 on 21      Leased
                                                             Acres
INTERNATIONAL:
CANADA:
Brooks, Alberta           Cleaning, Threading & Repair, &    8,000 on .25     Leased
                          Stationary Inspection Facility     Acres
Calgary, Alberta          Pipeline Services Facility         33,825 on .8     Leased
                                                             Acres
                          Sales and Inspection Facility      20,000 on .63    Owned
                                                             Acres
Edmonton, Alberta         Nisku Complex: Coating Plant,      114,000 on 40    Owned
                          Inspection Facility Pipeline       Acres
                          Services and Maintenance Center
Leduc, Alberta            Solids Control Equipment Rental    38,626 on 9.36   Owned
                          and Services Facility              Acres
Nisku, Alberta            Threading & Repair, Portable       7,580 on 1.45    Owned
                          Inspection & Cleaning, Division    Acres
                          Office
Provost, Alberta          Inspection, Cleaning, Threading    8,750 on .18     Leased
                          Repair Facility                    Acres
ARGENTINA:
Plaza Huincul, Neuquen    Reclamation and Inspection         2,000 on 2.3     Leased
 State                    Facility                           Acres
Comodoro Rivadavi,        Reclamation and Inspection         7,300 on 1.1     Leased
 Chubut State             Facility                           Acres
Los Perales, Santa Cruz   Tubings--sucker rods yard          700 on 2.47      Leased
 State                                                       Acres
Rinco de los Sauces,      Solid control yard                 960 on 88 Acres  Leased
 Neuquen State
BOLIVIA:
Santa Cruz de la Sierra,  Pipe and Solid control yard,       18,000 on 1.72   Leased
 Andres Ibanez            warehouse, & Office                Acres
COLOMBIA:
Yopal, Colombia           Warehouse, Storage Yard and        4,600 on 3.75    Leased
                          Offices                            Acres
PERU:
San Isidro, Lima          Office                             177              Leased
Callao, Lima              Warehouse                          656              Leased
Iquitos, Maynas           Office and Warehouse               9,187            Leased
TRINIDAD:
Couva, Trinidad           Manufacturing                      8,073 on .5      Leased
                                                             Acres
VENEZUELA:
Anaco, Venezuela          Inspection Facility                600 on 2.5       Leased
                                                             Acres
Maracaibo, Venezuela      Solids Control Facility            25,000 on 1      Owned
                                                             Acre
EQUADOR:
Quito                     Office, Pipeyard, Warehouse,       1,184            Leased
                          Manufacturing facility, Service
                          facility, Repair facility
FRANCE:
Berlaimont, France        Coating Plant                      44,000 on 16     Owned
                                                             Acres
SINGAPORE:
Jurong, Singapore         Coating Plant                      50,644 on 8      Building Owned*
                                                             Acres
Jurong, Singapore         Inspection Facility                19,429 on 3      Building Owned*
                                                             Acres
UNITED KINGDOM:
Bordon, England           Pipeline Services Center           12,000 on .75    Building Owned*
                                                             Acres
Aberdeen, Scotland        Inspection Facility & Coating      45,209 on 1      Owned
                          Plant                              Acre
                          Manufacturing & Administrative &   25,274 on 1.3    Leased
                          Sales                              Acres
                          Manufacturing & Administrative &   45,209 on 1      Owned
                          Sales                              Acre
</TABLE>
 
                                       14
<PAGE>
 
<TABLE>
<CAPTION>
                                                                  SIZE
                                                              (APPROXIMATE
       LOCATION                     DESCRIPTION               SQUARE FEET)    OWNED/LEASED
       --------                     -----------             ---------------  ---------------
<S>                      <C>                                <C>              <C>
Dundee, Scotland         Manufacturing                      16,000 on 3.7    Owned
                                                            Acres
Montrose, Scotland       Manufacturing and Assembly         22,400 on 1.5    Owned
                                                            Acres
                         Warehouse                          28,000           Leased
Dorset, England          Manufacturing & Administrative &   12,700 on .33    Leased
                         Sales                              Acres
GERMANY:
Celle, Germany           Inspection Facility,               43,560 on 12     Building Owned*
                         Administrative & Engineering       Acres
                         Offices
Gladbeck, Germany        Coating Plant                      25,635 on 4      Owned
                                                            Acres
NETHERLANDS:
Veenoord, Netherlands    Reclamation and Repair Facility    53,361 on 2      Leased
                                                            Acres
SAUDI ARABIA:
Al Khobar, Saudi Arabia  Reclamation, Inspection Facility   340,203 on 8     Leased
                         and Offices                        Acres
</TABLE>
--------
 * Building owned subject to a ground lease.
** Land leased to building owner under a 99 year 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. A description of certain of these proceedings
follows. The Company is unable to predict the outcome of these proceedings;
however, for the reasons set forth below, 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 for three other claims arising out of allegations of
exposure to asbestos, benzene and certain other substances alleged to have
been used primarily during its processes in the 1960s and 1970s. 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.
 
  Pursuant to an agreement executed in connection with the acquisition of the
Company in 1988, Minstar agreed, subject to certain limitations, to hold the
Company harmless from and against any and all losses,
 
                                      15
<PAGE>
 
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, subject to certain limitations, 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. There is, however, a dispute with Minstar concerning whether the
indemnification referenced in the first sentence of this paragraph 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 in litigation that arose out of the rupture of
Texas Eastern's natural gas pipeline in Edison, New Jersey, in March of 1994.
The plaintiffs consist almost exclusively of the residents and family members
of an apartment complex that was located within several hundred feet of the
point of origin of the pipeline rupture. The plaintiff's claims include, but
are not limited to, claims for property damage, personal injury, medical
bills, lost income, loss of consortium, lost wages, living shelter, emotional
injury, interruption of schooling, permanent disability, mental anguish, and
attorney's fees and costs. The Defendants include Texas Eastern, Quality
Materials, Inc., Tuboscope Pipeline Services, Inc. ("TPSI"), and current and
prior landowners of land adjacent to the pipeline right-of-way. The current
number of plaintiffs is approximately 1,800 individuals. These cases are
globally addressed in Master Litigation No. L-614614-93; Nancy Kemps, et al.
v. Texas Eastern Transmission Corp., et al.; In the Superior Court of New
Jersey, Law Division, Middlesex County. An additional action has been brought
by a co-defendant, Civil Action No. 94-1644; Quality Materials, Inc. v. Texas
Eastern Corp. and Texas Eastern Transmission Corp., In the United States
District Court of New Jersey. Also, an adjacent land owner has filed a
separate action styled L-0000Z-96 Edison Tyler Villages LLC. v. Texas Eastern
Transmission Corp. in the Superior Court of New Jersey, Middlesex County, Law
Division. A defense is being provided by the Company's insurance carrier
subject to a reservation of rights letter. Management believes, based upon
insurance and its rights against co-defendants, that these cases will not have
a material adverse effect on the Company's results of operations or financial
condition.
 
  The Company is a Defendant in litigation styled Artisan Corporation v.
Optima Petroleum Corporation--Optima Petroleum Corporation and Dunhaven Energy
Inc. vs. Artisan Corporation and Tuboscope Vetco Canada Inc. causes No. 9601-
06975 and 9601-9867, Court of Queen's Bench of Alberta, Judicial District of
Calgary. The plaintiffs allege breach of contract and negligence in connection
with inspection of drill pipe in Canada in 1995 and seek damages in excess of
8 million Canadian Dollars. Management believes that, based upon insurance and
its rights and defenses against co-parties that this case will not have a
material adverse effect on the Company's results of operations or financial
condition. This action is being vigorously contested.
 
  The products acquired by the Company due to the Drexel Merger are used in
complex industrial applications. Litigation arising from a catastrophic
occurrence at such applications may result in the Company being named as a
defendant in lawsuits asserting large claims. Although the Company believes
its insurance coverage is adequate for its current operations and its
uninsured losses from product liability claims have not been significant, a
successful liability claim for which the Company is underinsured or uninsured
could have a material adverse effect on the Company.
 
  The Company is a defendant in litigation in the United States District Court
for the Southern District of Texas, Houston Division, styled Derrick
Manufacturing Corporation vs. Advanced Wirecloth, Inc., Environmental
Procedures, Inc. dba SWECO Oilfield Services, Vincent D. Leone, and William S.
Cagle; Civil Action No.942417 which is a consolidated action, having
consolidated Civil Action No.95-3653 into that Civil Action. Plaintiff asserts
a number of claims related to the Company's screen manufacturing and its
solids control
 
                                      16
<PAGE>
 
business including: (1) infringement of United States Patent No.4,575,421; (2)
trademark infringement under 15 U.S.C. (S)1114, Section 32 of the Lanham Act;
(3) unfair competition under 15 U.S.C. (S)1125(a), Section 43(a) of the Lanham
Act; (4) state common law unfair competition; and (5) violation of Texas'
Anti-Dilution Act. Plaintiff has asked for an unspecified amount of damages
arising from these claims as well as a permanent injunction, as asserted in
the original action as well as claims including: (1) infringement of United
States Patent No.5,417,859; (2) trademark infringement under 15 U.S.C.
(S)1114, Section 32 of the Lanham Act; (3) unfair competition under 15 U.S.C.
(S)1125(a), Section 43(a) of the Lanham Act; (4) state common law unfair
competition; (5) false marking of Advanced's and SWECO's screens with U.S.
Patent No.5,385,669 in violation of 35 U.S.C. (S)292(a); and (6) violation of
Texas' Anti-Dilution Act. Plaintiff has asked for an unspecified amount of
damages arising from these claims as well as for preliminary and permanent
injunctions.
 
  All claims against defendant William S. Cagle have been dismissed. A
separate case involving one of the same two patents asserted by Derrick
against Advanced Wirecloth, but involving a different screen manufacturer as
defendants, was tried to a jury before the same Judge in Derrick Manufacturing
Corporation vs. Southwestern Wire Cloth, Inc., Southwestern Wire Cloth
Oilfield Screens, Inc. and Robert E. Norman, Civil Action No.H-94-0135 in the
United States District Court for the Southern District of Texas. The Judge
entered a judgment as a matter of law that the patent in suit was procured by
inequitable conduct and is unenforceable, notwithstanding a jury verdict
against the defendant awarding the Plaintiff $4,000,000 in damages. The
Southwestern case is now on appeal to the Court of Appeals for the Federal
Circuit. If the district court's judgment is affirmed on appeal, the Company
believes that it will have no exposure on the patent in the suit that was
adjudicated and common to the Southwestern and Advanced Wirecloth cases, i.e.,
United States Patent No.4,575,421. In view of the appeal in the Derrick vs.
Southwestern Wire Cloth case, all proceedings in the Advanced Wirecloth case
have effectively been stayed pending the outcome of the Southwestern appeal.
Notwithstanding the outcome of the Southwestern Wirecloth cases the Company
believes it has strong defenses to all of Derrick's allegations and that based
on these and certain indemnities from the Seller's in the SOFS-Drexel
transaction, and insurance the result from this litigation will not have a
material adverse effect on the Company's results of operations or financial
condition. This action is being vigorously contested.
 
  The Company is aware of an investigation by the Department of Justice
concerning certain alleged violations of the International Emergency Economic
Powers Act which may involve the Company. The Company has not been officially
notified or served with any process with respect to such investigation. The
Company believes that the outcome of this investigation will not have a
material adverse effect upon the Company.
 
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 1997.
 
                                      17
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY STOCK AND RELATED STOCKHOLDER
MATTERS
 
  The Company's common stock is reported on the New York Stock Exchange (NYSE)
under the symbol "TBI". The Company's stock was previously reported on the
Nasdaq Stock Market under the symbol "TUBO". The Company changed its common
stock listing from the Nasdaq Stock Market to the New York Market on September
9, 1997. 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
Nasdaq or the NYSE:
 
<TABLE>
<CAPTION>
                                                1997             1996
                                              ------------     -------------
                                              HIGH    LOW      HIGH     LOW
                                              ----    ----     ----     ----
<S>                                           <C>     <C>      <C>      <C>
1st Quarter.................................. $16 1/8 $11 1/2  $10 1/4  $ 5 7/8
2nd Quarter..................................  28 3/4  15 3/8   13 7/16   9 7/8
3rd Quarter..................................  31 3/8  18 3/4   15 7/8   10 5/16
4th Quarter..................................  36      17 7/16  16 1/2   13 1/2
</TABLE>
 
  The closing price of the Company's common stock on February 5, 1998 was
$22.69. The approximate number of stockholders of record on February 5, 1998
was 226.
 
  Holders of Tuboscope Common Stock are entitled to such dividends as may be
declared from time to time by the Tuboscope 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. The Company's Senior Credit Agreement
restricts the Company from paying dividends on its capital stock until all
mandatory prepayments have been made from excess cash flow and the total
funded debt to capital ratio is not greater than 40%. The Company's total
funded debt to capital ratio (as defined under the agreement) was 42.5% at
December 31, 1997. The Company was therefore prohibited from paying dividends
under the terms of its Senior Credit Agreement at December 31, 1997.
 
                                      18
<PAGE>
 
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. See Note 3
of the Notes to the Consolidated Financial Statements regarding the 1997 and
1996 acquisitions.
 
<TABLE>
<CAPTION>
                                    YEARS ENDED DECEMBER 31,
                          --------------------------------------------------
                            1997     1996         1995      1994      1993
                          -------- --------     --------  --------  --------
                            (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
                                             DATA)
<S>                       <C>      <C>          <C>       <C>       <C>
STATEMENT OF OPERATIONS
 DATA:
Revenue.................. $525,231 $341,431     $190,015  $192,175  $183,340
Cost of sales............  362,251  243,854      138,367   140,462   137,188
Gross profit.............  162,980   97,577       51,648    51,713    46,152
Selling, general and
 administrative expense..   51,475   35,662       20,732    21,511    26,773
Research and engineering
 costs...................   10,580    6,595        3,456     3,154     3,678
Write-off of assets and
 restructure costs.......      --    76,601          --        --     13,256
                          -------- --------     --------  --------  --------
Operating profit (loss)..  100,925  (21,281)(1)   27,460    27,048     2,445(1)
Interest expense.........   14,456   13,414       12,328    12,190    10,595
Other (income) expense,
 net.....................    1,520      293          (73)      569     2,657
                          -------- --------     --------  --------  --------
Income (loss) before
 income taxes and
 extraordinary loss......   84,949  (34,988)      15,205    14,289   (10,807)
Provision (benefit) for
 income taxes............   31,845    8,238        6,386     6,001    (2,445)
Income (loss) before
 extraordinary loss......   53,104  (43,226)       8,819     8,288    (8,362)
Extraordinary loss, net
 of income tax...........      --    (6,373)         --       (764)   (4,497)
                          -------- --------     --------  --------  --------
Net income (loss)........   53,104  (49,599)       8,819     7,524   (12,859)
Dividends applicable to
 redeemable preferred
 stock...................      --       --           700       700       700
                          -------- --------     --------  --------  --------
Net income (loss)
 applicable to common
 stock................... $ 53,104 $(49,599)    $  8,119  $  6,824  $(13,559)
                          ======== ========     ========  ========  ========
Earnings (loss) per
 common share............ $   1.22 $  (1.35)    $    .44  $    .37  $   (.74)
                          ======== ========     ========  ========  ========
Earnings (loss) per
 common share assuming
 dilution................ $   1.14 $  (1.35)    $    .44  $    .37  $   (.74)
                          ======== ========     ========  ========  ========
OTHER DATA:
EBITDA(2)................ $125,515 $ 72,633     $ 42,570  $ 40,859  $ 27,262
Ratio of EBITDA to
 interest expense(3).....     8.7x     5.4x         3.5x      3.4x      2.6x
Ratio of earnings to
 fixed charges(4)........     6.8x     3.9x         2.2x      2.1x      1.2x
Depreciation and
 amortization............ $ 26,110 $ 17,606     $ 15,037  $ 14,380  $ 14,218
Capital expenditures..... $ 35,190 $ 18,681     $  7,645  $  7,549  $ 14,640
BALANCE SHEET DATA (END
 OF PERIOD):
Working capital.......... $ 81,294 $ 74,393     $ 44,623  $ 35,926  $  5,279
Total assets.............  686,167  505,165      306,679   317,027   310,108
Total debt...............  218,377  184,743      111,617   123,851   101,489
Preferred stock..........      --       --        10,175    10,175    10,175
Common stockholders'
 equity..................  300,033  218,902      121,441   113,424   105,256
</TABLE>
--------
(1) The 1996 operating loss includes $63.1 million of charges for the write-
    off of certain assets, $11.3 million of Drexel transaction costs, and $2.2
    million of charges for the write-off of Italian operations. Excluding
    these costs, operating profit in 1996 was $55.3 million. The 1993
    operating profit includes restructuring charges of $13.3 million.
    Excluding these costs, operating profit in 1993 was $15.7 million.
 
(2) "EBITDA" means earnings before interest, taxes, depreciation,
    amortization, restructuring charges, write-off of long-lived assets,
    Drexel transaction costs, write-off of Italian operations 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.
 
(3) 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.
 
(4) For the purpose of this calculation, "earnings" consist of net income
    (loss) before income taxes, write-off of long-lived assets, Drexel
    transaction costs, write-off of Italian operations, restructuring charges,
    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. Earnings were insufficient to cover fixed charges by $20.8
    million in 1996 if the write-off of long-lived assets, Drexel transaction
    costs, and the write-off of Italian operations is included in earnings.
    Earnings were insufficient to cover fixed charges by $12.1 million in 1993
    if restructuring charges are included in 1993 earnings.
 
                                      19
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
 
GENERAL
 
 Drexel Merger and Other Significant Events
 
  The Company completed the Drexel Merger on April 24, 1996. The Drexel Merger
represented the combination of the largest provider of oilfield-related
inspection and coating services in the world with the world's leading provider
of solids control equipment and services to the oil and natural gas industry
and coiled tubing units and related pressure control equipment to oilfield
service companies.
 
  The Drexel Merger, together with seven subsequent strategic acquisitions
completed during 1996 and eleven additional strategic acquisitions completed
during 1997, have significantly impacted the operating results, financial
condition, liquidity, and direction of the Company. Excluding the Drexel
Merger, the total consideration for the 1997 and 1996 acquisitions was $134.6
million consisting of net cash of $80.1 million, notes payable of $12.4
million, equity of $23.9 million, and accrued payments of $18.2 million. A
summary of the 1997 and 1996 acquisitions is included in Note 3 to the 1997
Consolidated Financial Statements.
 
  The Company's strategic acquisitions following the Drexel Merger have
accomplished the following goals:
 
*  Provided the Company with a leading solids control equipment and services
   market position in Canada with its acquisitions of Wadeco Oilfield Services
   Ltd. ("Wadeco") and Polar Oilfield Services in 1996 and its acquisitions of
   Fisher Fluids Processing Inc. and the operating assets of Blackfire Oil
   Inc. in 1997.
 
*  Established the Company as a leading provider of solids control equipment
   and services on the Louisiana Gulf Coast with its acquisition of Gauthier
   Brothers Rentals, Inc. ("Gauthier Brothers") in 1996, and expanded the
   Company's solids control product offerings with its acquisitions of the
   Solids Control Division of Nu-Tec, Inc., WMCO Instruments, Inc. and WMCO
   Equipment Inc. in 1997.
 
*  Increased the Company's solids control sales and market share in Venezuela
   with its acquisition of substantially all the assets of Western Service and
   Supply, S.A.
 
*  Increased the Company's worldwide pipeline inspection market share and
   achieved consolidation cost benefits and integrated technologies with its
   acquisition of Vetco Pipeline Services, Inc. ("Vetco Pipeline") in 1996.
 
*  Increased the Company's manufacturing capabilities and further strengthened
   the Company's presence in the growing market for coiled tubing and wireline
   pressure control products with its acquisition of S.S.R. (International)
   Ltd. and Pressure Control Engineering Ltd. in 1996 and its acquisition of
   Tulsa Equipment Manufacturing Company, a manufacturer of pressure pumping
   equipment, in 1997.
 
*  Established the Company as a leading manufacturer of high pressure fiber
   glass tubulars used in oil field applications through its acquisition of
   Fiber Glass Systems, Inc. ("FGS") in 1997.
 
*  Expanded the Company's tubular services product offerings through the
   acquisitions of Gator Hawk, Inc., a leading provider of external
   hydrostatic pressure testing of tubular connections; Cut-Rite Tubular
   Services Ltd., a provider of inspection, repair and cleaning services in
   Canada; and the Tubular Inspection Division of Pro Serv AS, a provider of
   inspection services in Norway.
 
*  Increased the Company's solids control centrifuge manufacturing and
   refurbishment capabilities with its acquisition of SouthWest Centrifuge,
   Inc.
 
*  Enhanced the Company's solids control product line and entered the liner
   hanger market in the North Sea with its acquisition of the Enaco Plc
   ("ENACO") companies and certain operating assets owned by ENACO's
   shareholders.
 
  In addition to these acquisitions, the Company took the following actions in
1997 and 1996 to improve its overall profitability, financial condition, and
liquidity:
 
*  In connection with the Drexel Merger, the Company raised net equity of
   $29.1 million by executing the sale of 4.2 million shares of its Common
   Stock and warrants to purchase 2.533 million shares of Common
 
                                      20
<PAGE>
 
   Stock at $10 per share to a partnership affiliated with SCF Partners, LP.
   In addition, the Company converted 100,000 shares of Series A Convertible
   Preferred Stock into 1.5 million shares of Common Stock and warrants to
   purchase 1.25 million shares of Common Stock at an exercise price of $10
   per share.
 
*  The Company completed the consolidation of its solids control manufacturing
   operations to help improve profitability and efficiencies. In addition, the
   operating facilities of the Company and Drexel were consolidated in Texas,
   California, Argentina, Scotland, Colombia, and Singapore. Also, corporate
   overhead functions were consolidated in Houston, and the eastern hemisphere
   headquarters were consolidated in Aberdeen, Scotland.
 
*  The Company consolidated the operations of recently acquired Vetco Pipeline
   with its existing pipeline services operations.
 
*  The Company shut down or sold operations which were performing at less than
   satisfactory levels, including its U.S. tank inspection operation, and its
   oilfield inspection operations in Japan and Italy.
 
*  The Company established a solids control market presence in Argentina and
   began screen manufacturing operations in Trinidad and Canada.
 
*  The Company achieved significant technological advances in several
   products, including the delivery of five coiled tubing drilling units, the
   successful installation and operation of two Truscope(R) units (full body
   rotary ultrasonic inspection system) at major oil country tubular
   manufacturing facilities, and the commercial introduction of TruRes(R) unit
   (high-resolution pipeline inspection).
 
*  In August 1996, the Company refinanced the Bank Credit Facility. The new
   agreement included a $130 million term loan facility, a $100 million
   revolving credit facility, and a $5 million swingline facility. The new
   facility has been used to retire debt outstanding under the previous senior
   credit agreement and the $75 million 10 3/4% Senior Subordinated Notes (the
   "10 3/4% Notes"), and to finance growth and acquisitions. At December 31,
   1997, the Company had $16.5 million available for borrowing under its
   revolving credit facility.
 
*  The Company consolidated its U.S. solids control manufacturing of
   centrifuges and screens into their own manufacturing locations to provide
   an increased focus on their processes.
 
*  The Company expanded its fleet of pipeline inspection equipment and
   increased the high resolution market penetration with the introduction of
   TR1000(TM) tools.
 
 Operating Environment Overview and Pro Forma Discussion
 
  The Company's results depend, in large part, on the level of worldwide oil
and gas drilling and production activity, the price of oil and gas, and
worldwide oil and gas inventory levels. Key industry indicators for the past
three years include the following:
 
<TABLE>
<CAPTION>
                                                            1997*  1996*  1995*
                                                            ------ ------ ------
<S>                                                         <C>    <C>    <C>
Rig Activity:
  U.S......................................................    943    779    723
  Canada...................................................    374    271    231
  International............................................    810    805    757
                                                            ------ ------ ------
  Worldwide................................................  2,127  1,855  1,711
                                                            ====== ====== ======
U.S. Workover Rig Activity.................................  1,422  1,334  1,277
                                                            ====== ====== ======
West Texas Intermediate Crude (per barrel)................. $20.70 $22.01 $18.46
                                                            ====== ====== ======
Natural Gas Prices $/mtbu (per mbtu).......................  $2.40  $2.41  $1.47
                                                            ====== ====== ======
</TABLE>
--------
* 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 Spears and Associates.
 
                                      21
<PAGE>
 
  Worldwide drilling and U.S. workover activity improved during 1997. U.S.,
Canada, and international rig activity in 1997 increased 21%, 38%, and 1% over
1996 levels, while U.S. workover activity in 1997 was up 7% from 1996 levels.
The price for West Texas Intermediate Crude declined 6% in 1997 compared to
1996, and 1997 natural gas prices were down slightly from 1996 levels. The
overall improvement in market conditions created strong demand for the
Company's products and services which, together with the 1997 and 1996
initiatives discussed above, resulted in improved operating results as shown
in the Company's following actual and pro forma (giving effect to all 1996 and
1997 acquisitions) financial statements (in thousands, except per share
amounts):
 
<TABLE>
<CAPTION>
                                       1997              1996            1995
                                 ----------------- ------------------  --------
                                   PRO               PRO
                                  FORMA    ACTUAL   FORMA     ACTUAL    ACTUAL
                                 -------- -------- --------  --------  --------
                                   (1)               (1)
<S>                              <C>      <C>      <C>       <C>       <C>
Revenue......................... $559,213 $525,231 $479,458  $341,431  $190,015
Net Income Before Write-Off of
 Assets, Merger Costs, and
 Extraordinary Charges.......... $ 55,145 $ 53,104 $ 32,244  $ 25,384  $  8,819
Net Income (Loss)............... $ 55,145 $ 53,104 $(42,731) $(49,599) $  8,819
Dilutive earnings Per Share
 Before Write-Off of Assets,
 Merger Costs, and Extraordinary
 Charges........................    $1.17    $1.14    $0.72     $0.69     $0.44
Dilutive earnings (Loss) Per
 Share..........................    $1.17    $1.14   $(0.96)   $(1.35)    $0.44
</TABLE>
--------
(1) Pro forma information is unaudited and is presented as if the 1997 and
    1996 acquisitions were made as of January 1, 1996. Such information should
    not be considered indicative of actual results that would have been
    achieved if the 1997 and 1996 acquisitions had been consummated on January
    1, 1996.
 
  The $79.8 million (17%) increase in pro forma revenue for 1997 over 1996 was
due to several factors including: improved overall market conditions as
discussed above; significant growth in Latin American revenue and in revenue
from solids control and pipeline operations; greater revenue from the
Company's coiled tubing/pressure control products; and an increase in
worldwide coating sales.
 
  The pro forma 1997 net income of $55.1 million was $22.9 million higher than
the comparable amount in 1996 of $32.2 million (before write-off of assets,
merger costs, and extraordinary item). This increase was due to revenue growth
from greater activity levels as discussed in the results of operations.
 
  Subsequent to December 31, 1997, the average price of oil and gas has
declined. This change in price has been caused by various concerns, including
rising reported world oil inventories, the financial crisis in Asia, an
increase in official production quotas, concerns that increased Iraq
production might soon reenter the world market, and temperate weather
conditions. Although oil prices have declined, the U.S. rig count (as reported
by BHI) at January 23, 1998 was 996, up 6% over the average rig count for
1997. At the date of this report, the Company was not aware of any material
spending cut-backs of its major customers, although lower oil prices for a
prolonged period could result in some spending reductions, which could have a
material adverse affect on the Company.
 
  During 1997 the Company generated approximately $31.8 million, or 6%, of its
total revenue from Singapore, Malaysia, Indonesia, Thailand, Vietnam,
Australia, Japan, and Korea. Most of the Company's customers in these
countries are large, multinational oil companies with limited direct exposure
to the current economic climate in Southeast Asia, and a significant portion
of the Company's contracts are denominated in U.S. dollars. Management does
not believe that the economic downturn in Southeast Asia will have a material
direct adverse impact on the business of the Company, except to the extent
that reduced hybrocarbon demand in the area may contribute to lower oil and
gas prices and reduced oil and gas activity worldwide.
 
                                      22
<PAGE>
 
 1996 Write-off of Assets, Drexel Transaction Costs, and Extraordinary Charges
 
  During 1996 the Company incurred the following write-off of assets, Drexel
transaction costs, and extraordinary charges:
 
*  During the first quarter of 1996, the Company recorded a write-off of long-
   lived assets of $63.1 million. The write-off was due to the adoption of
   SFAS No. 121 and a decision by management to sell certain assets, primarily
   as a result of the Drexel Merger. See Note 2 of the Notes to the
   Consolidated Financial Statements.
 
*  During the second quarter of 1996, the Company recorded $11.3 million of
   transaction costs associated with the Drexel Merger. Severance payments to
   former executive officers of the Company represented $6.5 million of the
   transaction costs. The remaining costs related mainly to the consolidation
   of eastern hemisphere headquarters and consolidation costs associated with
   personnel and facilities.
 
*  During the fourth quarter of 1996, the Company decided to close its direct
   Italian operation, resulting in a write-off of assets of $2.2 million.
 
*  During the fourth quarter of 1996, the Company recorded an after-tax
   extraordinary charge of $6.4 million related to the early retirement of its
   outstanding 10 3/4% Notes. See Note 6 of the Notes to the Consolidated
   Financial Statements.
 
RESULTS OF OPERATIONS
 
 Year Ended December 31, 1997 vs Year Ended December 31, 1996
 
  Revenue. Revenue for the year ended December 31, 1997 was $525.2 million, an
increase of $183.8 million, or 54%, over the $341.4 million of revenue in
1996. On a pro forma basis giving effect to only the Drexel acquisition, 1997
revenue was up $148.5 million, or 39%, over 1996 revenue. This increase was
due to greater activity during 1997, the 1997 acquisitions and the full year
effect of the 1996 acquisitions. Increases in internal growth revenue
accounted for $78.1 million, or 53% of the $148.5 million increase in pro
forma revenue, while the 1997 and 1996 acquisitions (excluding the Drexel
Merger) increased pro forma revenue by $70.4 million, or 47%.
 
  Tubular Services, comprised of Inspection, Coating and Mill Systems and
Sales, generated revenue of $225.0 million in 1997, an increase of $51.2
million, or 29%, over 1996 revenue of $173.8 million. Inspection operations
grew 9.7% over the 1996 levels due primarily to the acquisitions of Gator
Hawk, Cut-Rite, and the tubular inspection division of Pro Serv AS, and an
increase in North American revenue, which resulted, in part, from a 25%
increase in the average North American rig count. Tubular coating and
corrosion control revenue in 1997 increased 60% from 1996 levels due mainly to
the acquisition in March 1997 of FGS and a 31% increase in North American
revenue as a result of higher activity levels. Mill Systems and Sales revenue
was higher due to the sale of high speed ultrasonic equipment in the U.S. and
the sale of equipment into the CIS during 1997.
 
  Solids Control Products and Services revenue was $155.4 million in 1997, an
increase of $78.1 million, or 101%, over 1996 revenue of $77.3 million. The
Drexel Merger added the rental and sale of solids control products to the
Company's operations. The 1996 and 1997 acquisitions (excluding the Drexel
Merger) accounted for a $24.0 million increase in solids control rental
revenue. U.S. solids control rental operations increased 147% primarily due to
the acquisition of Gauthier Brothers and growth in the Gulf Coast market.
Canadian rental revenue grew 139% due primarily to the Wadeco acquisition in
1996, the acquisition of Fisher Fluids in August 1997, the acquisition of the
operating assets of Blackfire Oil Inc. in August-September 1997 and general
market growth as represented by the 38% increase in the Canadian average rig
count in 1997. Latin American rental revenue increased 83% in 1997 over 1996
due primarily to the Company's operations in Venezuela, Mexico, and Colombia.
Further growth in rental revenue occurred in Europe with the acquisition of
ENACO and an increase in general activity. Solids control equipment sales in
1997 increased 69% over 1996 levels due primarily to increased U.S. and Latin
American sales.
 
  Coiled Tubing and Pressure Control Products revenue was $83.4 million in
1997, an increase of $36.4 million, or 77%, over 1996 revenue of $47.0
million. This increase was due to (i) the full year impact of the
 
                                      23
<PAGE>
 
Drexel Merger, (ii) the 1997 acquisitions and the full year impact of the 1996
acquisitions (excluding the Drexel Merger), which collectively accounted for
$13.7 million of the increase in revenue, and (iii) the growth in the sale of
coiled tubing units and coiled tubing blowout preventors.
 
  Pipeline and Other Industrial Services revenue was $61.4 million, an
increase of $18.1 million, or 42%, over 1996 revenue of $43.4 million.
Pipeline revenue grew $14.1 million due to strong growth in the North American
and Latin American markets, the acquisition of Vetco Pipeline and the
successful introduction of "Tru Res" (high resolution pipeline inspection
unit). In addition, Industrial Services increased $5.3 million over 1996
levels primarily due to improving operations in the Middle East.
 
  Gross Profit. Gross profit was $163.0 million, an increase of $65.4 million,
or 67%, over 1996 profits of $97.6 million. This increase was primarily due to
the Drexel Merger, the 1997 and 1996 acquisitions, and the growth in revenue
discussed above.
 
  Selling, General, and Administrative Costs. Selling, general and
administrative costs were $51.5 million in 1997, an increase of $15.8 million
over 1996 costs of $35.7 million. This increase was due primarily to increased
costs associated with the 1997 acquisitions and the full year effect of 1996
acquisitions.
 
  Research and Engineering Costs. 1997 research and engineering costs were
$10.6 million, an increase of $4.0 million over the 1996 costs of $6.6
million. The majority of these costs were related to solids control
innovations associated with screens, shakers, and centrifuges, the Company's
"Tru Res(R)" high resolution pipeline tools, and continuing efforts related to
product and service development in Tubular Services and Coiled Tubing
technology. The increase in costs was due primarily to research and
engineering projects associated with Drexel operations and the various
acquisitions in 1997 and 1996, and the Company's efforts to increase its
technological development.
 
  Write-off of Long-Lived Assets. The first quarter 1996 write-off of long-
lived assets of $63.1 million included (i) a writedown of $50.8 million
associated with the Company's adoption of SFAS No. 121 and (ii) a decision by
management to sell certain assets following the Drexel Merger, which resulted
in additional write-downs of approximately $12.3 million. See additional
discussions in Note 2 of the Notes to the Consolidated Financial Statements.
 
  Drexel Transaction Costs. The $11.3 million of Drexel transaction costs
incurred in 1996 included executive severance costs of $6.5 million associated
with former officers of the Company and consolidation costs of $4.8 million
related to Tuboscope personnel and facilities. The consolidation costs were
related mainly to the consolidation of overhead facilities and personnel in
Europe and the consolidation of certain operating locations in North America.
 
  Write-off of Italian Operations. The $2.2 million write-off of Italian
operations was due to a decision by the Company in December 1996 to exit
direct operations of its inspection business in Italy. In November 1996, the
Italian operations were placed in liquidation, and in February 1997 the
operations were officially shut down. The Italian operations contributed
approximately $2.5 million of revenue in 1996 with break-even profit results.
 
  Operating Profit (Loss). Operating profit was $100.9 million, an increase of
$45.6 million, or 82%, over 1996 profits of $55.3 million (excluding write-off
of long-lived assets, Drexel transaction costs, and the write-off of Italian
operations, as discussed above). Including these charges, operating profits
for 1997 were $100.9 million compared to a 1996 operating loss of $21.3
million. This improvement in operating profit was due to the increase in
operations related to increased activity levels and market share gains,
consolidation savings, minor price increases, and the effect of the 1997
acquisitions and the full year results of the 1996 acquisitions.
 
  Interest Expense. Interest expense was $14.5 million, an increase of $1.0
million over 1996 interest expense of $13.4 million. This increase was due to
an increase in debt resulting primarily from the 1996 and 1997 acquisitions.
The increase was partially offset by a lower effective interest rate resulting
from the Company's
 
                                      24
<PAGE>
 
retirement in the fourth quarter of 1996 of its 10 3/4% Notes from proceeds of
the Company's Senior Term Loan Facility. In addition, the Company entered into
four interest rate swap transactions in 1996 which effectively hedged $90
million of the Company's variable interest rate debt (see detailed discussion
in Note 6 to the 1997 Consolidated Financial Statements). Also in May 1997,
the Company purchased a $40 million collar agreement which provides protection
if interest rates rise above 7.77%.
 
  Other Expense (Income). Other expense, which includes interest income,
foreign exchange, minority interest, and other expense (net), resulted in a
net expense of $1.5 million, an increase of $1.2 million from 1996 net expense
of $.3 million. This increase was primarily related to a slight foreign
exchange expense in 1997 as compared to foreign exchange gains in 1996.
 
  Provision for Income Taxes. The Company's effective tax rate for 1997 was
37.5%. This rate is higher than the domestic rate of 35% due to charges not
allowed under domestic and foreign jurisdictions related to goodwill
amortization and foreign earnings subject to tax rates differing from domestic
rates.
 
  Net Income (Loss). Net income was $53.1 million in 1997, an improvement over
the 1996 net loss of $49.6 million. This improvement was due to the factors
discussed above.
 
 Year Ended December 31, 1996 vs Year Ended December 31, 1995
 
  Revenue. Revenue was $341.4 million for the fiscal year ended December 31,
1996, an increase of $151.4 million over 1995 results. The increase was
primarily related to the seven acquisitions the Company completed during 1996.
The Drexel Merger, which was completed April 1, 1996, accounted for $107.5
million of the increase.
 
  Revenue from the Company's Tubular Services, comprised of Inspection,
Coating, and Mill Systems and Sales, was approximately $173.8 million in 1996,
an increase of $20.1 million, or 13.1%, over 1995 results. Inspection revenue
increased in 1996 due to an increase in Latin American inspection operations,
which benefitted from the acquisition of an Argentina operation in September
1995 and a large contract in Colombia awarded in the fourth quarter of 1995.
In addition, Europe and North America Inspection operations increased as rig
activity increased slightly in both areas. Coating revenue also increased as a
result of improved volume at all of the Company's North America Coating plants
and stronger operations at the Scotland and Singapore Coating plants. Mill
Systems and Sales revenue was down due to lower international Mill equipment
sales.
 
  The Drexel Merger added the rental and sale of Solids Control equipment to
the Company's operations. In addition, the Company completed the acquisition
of Wadeco effective May 1, 1996. Solids Control operations, which includes the
rental and sale of equipment used in the removal of rock cuttings and other
solid contaminants from the fluids used in drilling operations, earned revenue
of $77.3 million since the effective date of the Drexel Merger and the
effective dates of other Solids Control acquisitions made in 1996. On a pro
forma basis, Solids Control revenue was up $13.0 million in 1996 over 1995 due
to increased activity in Latin America, specifically Venezuela and Argentina,
and greater revenue from North America rental operations.
 
  Coiled Tubing and Pressure Control Products, which were also acquired as
part of the Drexel Merger, contributed revenue of $47.0 million since the
effective date of the Drexel Merger and the acquisition of S.S.R.
(International) Ltd. and Pressure Control Engineering (SSR/PCE), in September
1996. Coiled Tubing Products included the sale of coiled tubing units,
wireline units, downhole tools and blowout preventors used in oilfield
workover, drilling and production operations. On a pro forma basis, Coiled
Tubing and Pressure Control Products revenue was up $10.5 million, due mainly
to an increase in Coiled Tubing sales in the North Sea and Norway, and the
sale of coiled tubing drilling units.
 
  Pipeline and Other Industrial Services revenue was $43.4 million in 1996, an
increase of $7.0 million over 1995 results. The improvement was primarily in
international pipeline operations as a result of greater revenue
 
                                      25
<PAGE>
 
in Saudi Arabia, Nigeria, and Argentina, and revenue from Vetco Pipeline,
which was acquired in September 1996. These results were offset to some extent
by lower Industrial Inspection revenue in the Middle East and the sale of the
Company's CTI Tank Inspection operation.
 
  Gross Profit. Gross profit was approximately $97.6 million (28.6% of
revenue) for 1996, compared to $51.6 million (27.2% of revenue) for 1995.
Drexel and Wadeco operations accounted for the majority of the 1996
improvement ($37.8 million of $46.0 million). Improved gross profit
percentages for 1996 benefited from greater revenue in high profit margin
product lines, including Pipeline, Coating, and Solids Control, and from lower
depreciation and amortization expense associated with the write-off of long-
lived assets in the first quarter of 1996.
 
  Selling, General, and Administrative Costs. Selling, general, and
administrative costs were $35.7 million in 1996, compared to $20.7 million in
1995. The $15.0 million increase was due primarily to $16.3 million of
overhead costs associated with the operations of Drexel, Wadeco, SSR/PCE, and
Vetco Pipeline since the effective dates of their acquisitions.
 
  Research and Engineering Costs. Research and engineering costs were $6.6
million in 1996, compared to $3.5 million in 1995. The increase was primarily
due to engineering costs associated with Drexel operations, which were $2.7
million since the effective date of the acquisition. Other increases were due
primarily to costs associated with the Company's TruRes(R) "High Resolution"
pipeline tools.
 
  Write-off of Long-Lived Assets. The first quarter 1996 write-off of long-
lived assets of $63.1 million included a writedown of $50.8 million associated
with the Company's adoption of SFAS No. 121 and a decision by management to
sell certain assets, primarily as a result of the Drexel Merger, which
resulted in additional write-downs of approximately $12.3 million.
 
  Drexel Transaction Costs. The $11.3 million of Drexel transaction costs
incurred in 1996 included executive severance costs of $6.5 million associated
with former officers of the Company and consolidation costs of $4.8 million
related to Tuboscope personnel and facilities. The consolidation costs were
related mainly to the consolidation of overhead facilities and personnel in
Europe and the consolidation of certain operating locations in North America.
 
  Write-off of Italian operations. The $2.2 million write-off of Italian
operations was due to a decision by the Company in December 1996 to exit
direct operations of its inspection business in Italy. In November 1996, the
Italian operations were placed in liquidation, and in February 1997 the
operations were officially closed. The Italian operations contributed
approximately $2.5 million of revenue in 1996 with break-even profit results.
 
  Operating Profit (Loss). Operating loss was $21.3 million for 1996 compared
to operating profit of $27.5 million in 1995. The operating loss was due to
the write-off of long-lived assets, Drexel transaction costs, and the write-
off of Italian operations, as discussed above. Excluding these charges,
operating profit would have been $55.3 million in 1996, an increase of $27.8
million over 1995 results. The improvement was mainly due to the operating
profit contributed by the Drexel operations since the merger date. In
addition, the acquisitions of Wadeco, SSR/PCE, and Vetco Pipeline also
contributed to the increase in operating profit, as well as stronger
operations from Coating, Pipeline, and Latin American Inspection operations
and the decrease in depreciation and amortization expense resulting from the
first quarter 1996 write-off of long-lived assets.
 
  Interest Expense. Interest expense was $13.4 million in 1996, a $1.1 million
increase over 1995. The increase was due to greater outstanding debt balances
as a result of the acquisitions, offset to some extent by lower effective
interest rates on outstanding debt balances.
 
  Other Expense (Income). Other expense (income), which includes interest
income, foreign exchange, amortization of debt financing cost, minority
interest, and other expense (income) resulted in a net gain of
 
                                      26
<PAGE>
 
$293,000 in 1996, compared to a net gain of $73,000 in 1995. The 1996 gain was
due to foreign exchange gains recognized primarily in the U.K. related to an
increase in the pound sterling compared to the U.S. dollar.
 
  Provision (Benefit) for Income Taxes. The Company reported a provision of
$8.2 million on a pre-tax loss of $35 million. The provision is primarily a
result of charges not allowable under domestic and foreign jurisdictions
related to the long-lived assets and Drexel transaction costs, goodwill
amortization and foreign earnings subject to tax at rates differing from the
domestic rate.
 
  The Company has, as of December 31, 1996, gross deferred tax assets of $10.2
million, which includes $3.3 million attributable to domestic and foreign net
operating loss carryovers. The Company has recorded a valuation allowance of
$1.2 million against these deferred tax assets. The Company believes that
sufficient sources of taxable income will occur in future periods so that the
net deferred tax assets will be realized.
 
  Extraordinary Loss, Net of Income Tax Benefit. In the fourth quarter of
1996, the Company retired its outstanding $75 million 10 3/4% Notes with the
proceeds from its Bank Credit Facility. The early retirement of the 10 3/4%
Notes resulted in an extraordinary loss of $6.4 million (net of income tax
benefits of $3.4 million). See Note 7 of the Notes to the Consolidated
Financial Statements.
 
  Net Income (Loss). Net loss was $49.6 million for 1996, compared to net
income of $8.8 million in 1995, due to the factors discussed above.
 
FINANCIAL CONDITION AND LIQUIDITY
 
  For the twelve months ended December 31, 1997, the Company generated $46.3
million of cash from operations as compared to $10.6 million in 1996.
Excluding changes in working capital accounts and other liabilities, cash
provided by operating activities was $89.9 million in 1997 compared to $29.1
million in 1996. The 1996 results included the transaction costs associated
with the Drexel Merger and an extraordinary loss due to the early retirement
of the 10 3/4% Notes. The Company's principal uses of cash generated from
operations were for capital expenditures, acquisitions, and debt payments. At
December 31, 1997, working capital was $81.3 million, an increase of $6.9
million from December 31, 1996. This increase was due primarily to the 1997
acquisitions, larger manufacturing operations, and a greater revenue base.
Accounts receivable increased $48.0 million as a result of the 1997
acquisitions and internal revenue growth. Total days sales outstanding based
on accounts trade receivable was 82.7 days and 82.3 days at December 31, 1997
and 1996, respectively. Inventory was up $31.1 million due to increased
manufacturing at the Company's Conroe, Ft. Worth, Houston and UK facilities to
meet the industry demand for the Company's products, coupled with inventories
associated with 1997 acquisitions. Accounts payable and accrued liabilities
increased mainly as a result of 1997 acquisitions and an increase in trade
payables due to the growth in operations. The current portion of long-term
debt increased due to the terms of the Bank Credit Facility and debt
associated with 1997 acquisitions.
 
  For the twelve months ended December 31, 1997, cash flows used for investing
activities were $73.0 million compared to $60.5 million in 1996. During 1997,
cash flows used for investing activities included $35.2 million of capital
spending and $36.9 million for 1997 acquisitions. Capital expenditures for
1997 were concentrated primarily in the fast growing Latin American, Canadian,
and Gulf Coast markets for solids control, oilfield inspection equipment and
pipeline operations. The Company anticipates that it will continue to invest
in its products and expects to fund its capital expenditure requirements in
1998 principally from cash generated from operations and its revolving credit
line.
 
  For the twelve months ended December 31, 1997, net cash generated from
financing activities was $29.0 million compared to $50.5 million in 1996. The
1997 cash generated from financing activities was principally from net
borrowings under the Company's Senior Credit Agreement and net proceeds from
the sale of the Company's Common Stock.
 
                                      27
<PAGE>
 
  Current and long-term debt was $218.4 million at December 31, 1997, an
increase of $33.6 million compared to December 31, 1996. This increase was due
mainly to borrowings on the revolving credit facility and debt assumed in the
1996 and 1997 acquisitions. The Company's outstanding debt at December 31,
1997 consisted of $115.3 million of term loans due under the Company's Bank
Credit Facility, $79.0 million due under the Company's revolving credit
facility, $5.0 million of convertible notes related to the acquisition of
Gauthier Brothers, $4.2 million of debt assumed in the FGS acquisition, $2.5
million due under the Company's swingline facility, and other debt of $12.4
million.
 
  The Company had $16.5 million available for borrowing at December 31, 1997
under a $100 million revolving credit facility and $1.3 million available
under its $5 million swingline facility, subject to certain financial
covenants which limit total borrowing availability. Approximately $4.5 million
of this revolving credit facility was used for outstanding letters of credit.
 
  The Company's Bank Credit Facility restricts the Company from paying
dividends on its capital stock unless the total funded debt to capital ratio
is less than 40%. The Company's total funded debt to capital ratio (calculated
as defined under the agreement) was 42.5% at December 31, 1997, 4.3 percentage
points lower than the December 31, 1996 ratio.
 
  See discussion of the Company's risk factors and foreign operations in Note
1 and Note 11 of the Notes to the Consolidated Financial Statements.
 
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 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. 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
 
                                      28
<PAGE>
 
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.
 
  The Company's 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 hazardous materials,
pursuant to which the Company has been required to incur compliance and clean-
up costs. 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.
 
YEAR 2000
 
  The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
implementing its plan to resolve the issue. The Year 2000 problem is a result
of computer programs being written using two digits (rather than four) to
define the applicable year. Any of the Company's programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will
not pose significant operational problems for the Company's computer systems
as so modified and converted.
 
PENDING ACCOUNTING PRONOUNCEMENTS
 
  In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131) which establishes standards for the way that public companies
report information about operating segments in both annual and interim
financial statements. SFAS No. 131 also establishes standards for disclosures
about products and services, geographic areas and major customers. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997. The
Company will adopt SFAS No. 131 retroactively in 1998. The adoption of SFAS
No. 131 will not affect the Company's results of operations or financial
position, but will increase the Company's disclosure of segment information.
 
  In June 1997, the FASB also issued SFAS No. 130, "Reporting Comprehensive
Income" which establishes new rules for the reporting and display of
comprehensive income. Adoption of SFAS No. 130 will have no impact on the
Company's net income or financial position. SFAS No. 130 would require the
Company's foreign currency translation adjustments, which are currently
reported in stockholders' equity, to be added to net income to determine total
comprehensive income. Disclosure of total comprehensive income is also
required.
 
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 14 of this Report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  None.
 
                                      29
<PAGE>
 
                                   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" and "Executive
Officers of the Company" of the registrant's definitive Proxy Statement for
its 1998 Annual Meeting to be filed with the Securities and Exchange
Commission (the "Commission") on or before April 30, 1998.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  There is hereby incorporated herein by reference the information appearing
under the captions "Executive Compensation" of the registrant's definitive
Proxy Statement for its 1998 Annual Meeting to be filed with the Commission on
or before April 30, 1998.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  There is hereby incorporated herein by reference the information appearing
under the caption "Voting Securities and Certain Holders Thereof" of the
registrant's definitive Proxy Statement for its 1998 Annual Meeting to be
filed with the Commission on or before April 30, 1998.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  There is hereby incorporated herein by reference the information appearing
under the caption "Certain Transactions" of the registrant's definitive Proxy
Statement for its 1998 Annual Meeting to be filed with the Commission on or
before April 30, 1998.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) 1. Financial Statements of the Company
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                        --------
<S>                                                                     <C>
Report of Independent Auditors........................................       F-1
Consolidated Balance Sheets at December 31, 1997 and 1996.............       F-2
Consolidated Statements of Operations for the years ended December 31,
 1997, 1996, and 1995.................................................       F-3
Consolidated Statements of Common Stockholders' Equity and Redeemable
 Preferred Stock for the years ended December 31, 1997, 1996, and
 1995.................................................................       F-4
Consolidated Statements of Cash Flows for the years ended December 31,
 1997, 1996, and 1995.................................................       F-5
Notes to Consolidated Financial Statements............................  F-6-F-21
</TABLE>
 
2. Financial Statement Schedules:
 
  The information under the following captions is filed as part of this
Report:
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Schedule I Parent Company Only Condensed Balance Sheets.................... S-1
Schedule I Parent Company Only Condensed Statements of Operations.......... 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
</TABLE>
 
  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 32.
 
  (b) Reports on Form 8-K
 
  There were no reports on Form 8-K filed the fourth quarter of 1997.
 
                                      30
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                           DESCRIPTION                          NOTE NO.
 -------                         -----------                          ---------
 <C>     <S>                                                          <C>
  2(a)   Agreement and Plan of Merger, dated as of January 3, 1996,   (Note 12)
         among Tuboscope Vetco International Corporation, Grow
         Acquisition Limited and D.O.S. Ltd.
  2(b)   Share Purchase Agreement dated as of May 31, 1996 between    (Note 15)
         TVI Wadeco Inc., J & S Hokanson Investments Ltd., John
         Hokanson, Douglass Bell, Robert Russell, Richard
         Rutherford and Wadeco Oilfield Services Ltd.
  2(c)   Stock Purchase and Sale Agreement dated as of September 6,   (Note 16)
         1996 by and among Tuboscope Pipeline Services, Inc., Vetco
         Pipeline Services, Inc., Rauma USA, Inc. and Rauma
         Corporation
  2(d)   Addendum No. 1 to Stock Purchase and Sale Agreement dated    (Note 16)
         as of September 20, 1996 by and among Tuboscope Pipeline
         Services, Inc., Vetco Pipeline Services, Inc., Rauma USA,
         Inc. and Rauma Corporation
  2(e)   Addendum No. 2 to Stock Purchase and Sale Agreement dated    (Note 16)
         as of September 20, 1996 by and among Tuboscope Pipeline
         Services, Inc., Vetco Pipeline Services, Inc., Rauma USA,
         Inc. and Rauma Corporation
  3(a)   Restated Certificate of Incorporation, dated March 12,       (Note 7)
         1990.
  3(b)   Amended and Restated Bylaws.                                 (Note 2)
  3(c)   Certificate of Designation of Series A Convertible           (Note 3)
         Preferred Stock, dated October 22, 1991.
  3(d)   Certificate of Amendment to Restated Certificate of          (Note 10)
         Incorporation dated May 12, 1992.
  3(e)   Certificate of Amendment to Restated Certificate of          (Note 11)
         Incorporation dated May 10, 1994.
  3(f)   Certificate of Amendment to Restated Certificate of          (Note 21)
         Incorporation dated April 24, 1996
  3(g)   Certificate of Amendment to Restated Certificate of          (Note 22)
         Incorporation dated June 3, 1997
  4(a)   Stockholders' Agreement, dated May 13, 1988, between the     (Note 1)
         Company, Brentwood, Hub, the Management Investors, the
         Other Investors, and the Institutional Investors,
         including the Common Stock Registration Rights Agreement
         attached thereto as Exhibit A.
  4(b)   Indenture (including the form of Note), dated as of April    (Note 4)
         1, 1993, among Tuboscope Vetco International Inc., the
         Company and Norwest Bank Minnesota, National Association,
         as Trustee, regarding the 10 3/4% Senior Subordinated
         Notes due 2003 of Tuboscope Vetco International Inc.
  4(c)   Supplemental Indenture dated as of December 18, 1996,        (Note 19)
         among Tuboscope Vetco International Inc., the Company and
         Norwest Bank Minnesota, National Association, as Trustee,
         regarding the 10 3/4% Senior Subordinated Notes due 2003
         of Tuboscope Vetco International Inc.
  4(d)   Various documentation relating to $1,000,000 Alaska
         Industrial Revenue Bond financing. (Not filed herewith
         pursuant to Item 601(b)(4)(iii) of Regulation S-K. The
         Company hereby agrees to furnish copies of relevant
         documentation to the Securities and Exchange Commission
         upon request).
  4(e)   Various documentation relating to $1,000,000 Wyoming
         Industrial Revenue Bond financing. (Not filed herewith
         pursuant to Item 601(b)(4)(iii) of Regulation S-K. The
         Company hereby agrees to furnish copies of relevant
         documentation to the Securities and Exchange Commission
         upon request).
  4(f)   Various promissory notes in the aggregate principal amount
         of $4,000,000 relating to the acquisition of Sound Optics
         Systems, Inc., dba South Optical Systems, Inc. (Not filed
         herewith pursuant to Item 601(b)(4)(iii) of Regulation S-
         K. The Company hereby agrees to furnish copies of the
         relevant documentation to the Securities and Exchange
         Commission upon request).
</TABLE>
 
                                       31
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.                           DESCRIPTION                          NOTE NO.
 -------                         -----------                          ---------
 <C>     <S>                                                          <C>
   4(g)  Secured Credit Agreement, dated August 2, 1996, between      (Note 14)
         Tuboscope Vetco International Inc., and Drexel Holdings,
         Inc., and The Chase Manhattan Bank, N.A., ABN Amro Bank
         N.V., Houston Agency, and the other Lenders Party Hereto,
         and ABN Amro Bank N.V., Houston Agency as Administrative
         Agent.
  10(a)  Savings Investment Plan, dated May 13, 1988, as amended by   (Note 1)
         First Amendment to Savings Investment Plan.
  10(b)  Second, Third and Fourth Amendments to Savings Investment    (Note 4)
         Plan.
  10(c)  Fifth, Sixth and Seventh Amendments to Savings Investment    (Note 8)
         Plan.
  10(d)  Supplementary Agreement Fixed Rental Scheme, dated May 19,   (Note 1)
         1989, between Jurong Town Corporation and AMF Far East
         Pte. Ltd.
  10(e)  Description of Life Insurance Plan.                          (Note 1)
  10(f)  Amended and Restated Stock Option Plan for Key Employees     (Note 5)
         of Tuboscope Vetco International Corporation.
  10(g)  Form of Revised Incentive Stock Option Agreement.            (Note 5)
  10(h)  Form of Revised Non-Qualified Stock Option Agreement.        (Note 5)
  10(i)  Stock Option Plan for Non-Employee Directors of Tuboscope    (Note 6)
         Vetco International Corporation.
  10(j)  Amendment to Stock Option Plan for Non-Employee Directors    (Note 6)
         of Tuboscope Vetco International Corporation.
  10(k)  Form of Non-Qualified Stock Option Agreement.                (Note 6)
  10(l)  Employee Qualified Stock Purchase Plan.                      (Note 8)
  10(m)  Purchase Agreement, dated as of September 30, 1991,          (Note 3)
         between the Company and BHI relating to the Vetco Services
         Acquisition.
  10(o)  Technology Transfer Agreement, dated as of October 29,       (Note 3)
         1991, between Tuboscope Inc. and BHI.
  10(p)  Lease Agreement with respect to Celle, Germany facility.     (Note 3)
  10(q)  Building Agreement for Land at Jurong, dated May 5, 1983,    (Note 3)
         between Jurong Town Corporation and Vetco International,
         Inc.
  10(r)  Lease between J.G.B. Properties Limited and Vetco            (Note 3)
         Inspection GmbH.
  10(s)  Eighth and Ninth Amendment to Savings Investment Plan.       (Note 9)
  10(t)  Subscription Agreement, dated as of January 3, 1996, by      (Note 12)
         and between Tuboscope Vetco International Corporation and
         SCF-III, L.P.
  10(u)  Exchange Agreement, dated as of January 3, 1996, among       (Note 13)
         Tuboscope Vetco International Corporation and Baker Hughes
         Incorporated.
  10(v)  Voting Agreement, dated as of January 3, 1996, among         (Note 12)
         Tuboscope Vetco International Corporation, D.O.S. Ltd.,
         D.O.S. Partners, L.P., Panmell (Holdings), Ltd. And Zink
         Industries Limited.
  10(w)  Voting Agreement, dated as of January 3, 1996, among         (Note 12)
         D.O.S. Ltd., Brentwood Associates IV, L.P. and Baker
         Hughes Incorporated.
  10(x)  Form of Amended and Restated Executive Agreement.            (Note 13)
  10(y)  Master Lease Agreement, dated December 18, 1995, between     (Note 13)
         the Company and Heller Financial Leasing, Inc.
  10(z)  1996 Equity Participation Plan.                              (Note 17)
 10(aa)  D.O.S. Ltd. 1993 Stock Option Plan.                          (Note 18)
 10(bb)  Agreement and Plan of Merger dated as of March 7, 1997 by    (Note 20)
         and among Tuboscope Vetco International Corporation, FGS
         Acquisition Corp. and Fiber Glass Systems Inc.
</TABLE>
 
                                       32
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
   NO.            DESCRIPTION            NOTE NO.
 -------          -----------           ----------
 <C>     <S>                            <C>
   21    Subsidiaries                   Exhibit 21
   23    Consent of Ernst & Young LLP   Exhibit 23
   27    Financial Data.                Exhibit 27
</TABLE>
--------
Note 1 Previously filed by the Registrant in Registration No. 33-31102 and
       incorporated by reference herein pursuant to Rule 12b-32 of the
       Exchange Act.
 
Note 2 Previously filed by the Registrant in Registration No. 33-33248 and
       incorporated by reference herein pursuant to Rule 12b-32 of the
       Exchange Act.
 
Note 3 Previously filed by the Registrant in File No. 33-43525 and
       incorporated by reference herein pursuant to Rule 12b-32 of the
       Exchange Act.
 
Note 4 Previously filed by the Registrant in Registration No. 33-56182 and
       incorporated by reference herein pursuant to Rule 12b-32 of the
       Exchange Act.
 
Note 5 Previously filed by the Registrant in Registration No. 33-72150 and
       incorporated by reference herein pursuant to Rule 12b-32 of the
       Exchange Act.
 
Note 6 Previously filed by the Registrant in Registration No. 33-72072 and
       incorporated by reference herein pursuant to Rule 12b-32 of the
       Exchange Act.
 
Note 7 Previously filed in the Company's Annual Report on Form 10-K for the
       fiscal year ended December 31, 1990 and incorporated by reference
       herein pursuant to Rule 12b-32 of the Exchange Act.
 
Note 8 Previously filed in the Company's Annual Report on Form 10-K for the
       fiscal year ended December 31, 1993 and incorporated by reference
       herein pursuant to Rule 12b-32 of the Exchange Act.
 
Note 9 Previously filed in the Quarterly Report on Form 10-Q for the quarter
       ended June 30, 1994 and incorporated by reference herein pursuant to
       Rule 12b-32 of the Exchange Act.
 
Note 10 Previously filed in the Company's Annual Report on Form 10-K for the
        fiscal year ended December 31, 1992 and incorporated by reference
        herein pursuant to Rule 12b-32 of the Exchange Act.
 
Note 11 Previously filed in the Company's Proxy Statement for the 1994 Annual
        Meeting of Stockholders and incorporated by reference herein pursuant
        to Rule 12b-32 of the Exchange Act.
 
Note 12 Previously filed in the Company's Current Report on Form 8-K filed on
        January 16, 1996 and incorporated by reference herein pursuant to Rule
        12b-32 of the Exchange Act.
 
Note 13 Previously filed in the Company's Annual Report on Form 10-K for the
        fiscal year ended December 31, 1995 and incorporated by reference
        herein pursuant to Rule 12b-32 of the Exchange Act.
 
Note 14 Previously filed in the Company's Quarterly Report on Form 10-Q for
        the quarter ended June 30, 1996 and incorporated by reference herein
        pursuant to Rule 12b-32 of the Exchange Act.
 
Note 15 Previously filed in the Company's Current Report on Form 8-K filed on
        June 14, 1996, as amended by Amendment No. 1 on Form 8-K/A filed on
        August 2, 1996, and incorporated by reference herein pursuant to Rule
        12b-32 of the Exchange Act.
 
Note 16 Previously filed in the Company's Current Report on Form 8-K filed on
        October 7, 1996, as amended by Amendment No. 1 filed on November 12,
        1996, and incorporated by reference herein pursuant to Rule 12b-32 of
        the Exchange Act.
 
Note 17 Previously filed by the Company in Registration No. 333-05233 and
        incorporated by reference herein pursuant to Rule 12b-32 of the
        Exchange Act.
 
Note 18 Previously filed by the Company in Registration No. 333-05237 and
        incorporated by reference herein pursuant to Rule 12b-32 of the
        Exchange Act.
 
Note 19 Previously filed in the Company's Annual Report on Form 10-K for the
        fiscal year ended December 31, 1996 and incorporated by reference
        herein pursuant to rule 12b-32 of the Exchange Act.
 
Note 20 Previously filed in the Company's current report on Form 8-K filed on
        March 19, 1997, as amended by Amendment No. 1 filed on May 7, 1997,
        and incorporated by reference herein pursuant to Rule 12b-32 of the
        Exchange Act.
 
Note 21 Previously filed by the Company as Appendix E in Registration No. 333-
        01869 and incorporated by reference herein pursuant to Rule 12b-32 of
        the Exchange Act.
 
Note 22 Previously filed in the Company's Proxy Statement for the 1997 Annual
        Meeting of Stockholders and incorporated by reference herein pursuant
        to Rule 12b-32 of the Exchange Act.
 
                                      33
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
                                          TUBOSCOPE INC.
 
                                                    /s/ L. E. Simmons
                                          By:__________________________________
                                                      L. E. Simmons
                                                  Chairman of the Board
 
  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.
 
 
<TABLE>
<CAPTION> 
              SIGNATURE                      TITLE                   DATE
              ---------                      -----                   ----
<S>                                  <C>                      <C> 
    /s/    L.E. Simmons              Chairman of the          February 5, 1998
-----------------------------------   Board
           L.E. Simmons
 
    /s/  John F. Lauletta            Director, President      February 5, 1998
-----------------------------------   and Chief Executive
         John F. Lauletta             Officer (Principal
                                      Executive Officer)
 
    /s/  Joseph C. Winkler           Executive Vice           February 5, 1998
-----------------------------------   President, Chief
         Joseph C. Winkler            Financial Officer and
                                      Treasurer (Principal
                                      Financial and
                                      Accounting Officer)
 
    /s/ Martin I. Greenberg          Vice President,          February 5, 1998
-----------------------------------   Controller,
        Martin I. Greenberg           Assistant Treasurer
                                      and Assistant
                                      Secretary
 
    /s/   Jerome R. Baier            Director                 February 5, 1998
-----------------------------------
          Jerome R. Baier
 
    /s/   Eric L. Mattson            Director                 February 5, 1998
-----------------------------------
          Eric L. Mattson
 
    /s/   Martin R. Reid             Director                 February 5, 1998
-----------------------------------
          Martin R. Reid
 
    /s/ Douglas E. Swanson           Director                 February 5, 1998
-----------------------------------
        Douglas E. Swanson
</TABLE> 
 
                                      34
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
 Tuboscope Inc.
 
  We have audited the accompanying consolidated balance sheets of Tuboscope
Inc. as of December 31, 1997 and 1996 and the related consolidated statements
of operations, common stockholders' equity and redeemable preferred stock, and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedules listed in the Index
at Item 14(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 generally accepted auditing
standards. 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 Tuboscope Inc. at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. 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, the Company
changed its method of accounting for the impairment of long-lived assets in
1996.
 
                                          ERNST & YOUNG LLP
 
Houston, Texas
February 4, 1998
 
                                      F-1
<PAGE>
 
                                 TUBOSCOPE INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31, DECEMBER 31,
                       ASSETS                             1997         1996
                       ------                         ------------ ------------
                                                           (IN THOUSANDS)
<S>                                                   <C>          <C>
Current assets:
  Cash and cash equivalents..........................   $ 12,593     $ 10,407
  Accounts receivable, net...........................    144,067       96,083
  Inventory, net.....................................     78,317       47,170
  Deferred income taxes..............................        984          776
  Prepaid expenses and other.........................     11,755       11,797
                                                        --------     --------
    Total current assets.............................    247,716      166,233
                                                        --------     --------
Property and equipment:
  Land, buildings and leasehold improvements.........     79,581       73,499
  Operating equipment and equipment leased to
   customers.........................................    208,052      167,440
  Accumulated depreciation and amortization..........    (77,072)     (59,559)
                                                        --------     --------
    Net property and equipment.......................    210,561      181,380
Identified intangibles, net..........................     23,315       22,583
Goodwill, net........................................    202,301      132,125
Other assets, net....................................      2,274        2,844
                                                        --------     --------
    Total assets.....................................   $686,167     $505,165
                                                        ========     ========
<CAPTION>
               LIABILITIES AND EQUITY
               ----------------------
<S>                                                   <C>          <C>
Current liabilities:
  Accounts payable...................................   $ 43,350     $ 28,896
  Accrued liabilities................................     76,596       41,554
  Income taxes payable...............................     15,902        4,876
  Current portion of long-term debt and short-term
   borrowings........................................     30,574       16,514
                                                        --------     --------
    Total current liabilities........................    166,422       91,840
Long-term debt.......................................    187,803      168,229
Pension liabilities..................................      8,916        9,846
Deferred taxes payable...............................     22,239       15,364
Other liabilities....................................        754          984
                                                        --------     --------
    Total liabilities................................    386,134      286,263
                                                        --------     --------
Common stockholders' equity:
Common stock, $.01 par value, 60,000,000 shares au-
 thorized, 44,235,591 shares issued and outstanding
 (41,612,495 at December 31, 1996)...................        442          416
  Paid-in capital....................................    294,402      261,932
  Retained earnings (deficit)........................     10,155      (42,949)
  Cumulative translation adjustment..................     (4,966)        (497)
                                                        --------     --------
    Total common stockholders' equity................    300,033      218,902
                                                        --------     --------
    Total liabilities and equity.....................   $686,167     $505,165
                                                        ========     ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-2
<PAGE>
 
                                 TUBOSCOPE INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                YEARS ENDED DECEMBER 31,
                                            ----------------------------------
                                               1997        1996        1995
                                            ----------  ----------  ----------
                                            (IN THOUSANDS, EXCEPT FOR SHARE
                                                  AND PER SHARE DATA)
<S>                                         <C>         <C>         <C>
Revenue:
  Sale of services and rental of equipment. $  335,339  $  248,415  $  182,171
  Sale of products.........................    189,892      93,016       7,844
                                            ----------  ----------  ----------
                                               525,231     341,431     190,015
                                            ----------  ----------  ----------
Costs and expenses:
  Cost of services sold and rental of
   equipment...............................    236,510     183,101     132,799
  Cost of products sold....................    120,460      58,127       4,258
  Amortization of goodwill.................      5,281       2,626       1,310
  Selling, general and administrative......     51,475      35,662      20,732
  Research and engineering costs...........     10,580       6,595       3,456
  Write-off of long-lived assets...........         --      63,061          --
  Drexel transaction costs.................         --      11,306          --
  Write-off of Italian operations..........         --       2,234          --
                                            ----------  ----------  ----------
                                               424,306     362,712     162,555
                                            ----------  ----------  ----------
Operating profit (loss)....................    100,925     (21,281)     27,460
Other expense (income):
  Interest expense.........................     14,456      13,414      12,328
  Interest income..........................       (331)       (470)       (210)
  Foreign exchange (gains) losses..........         69      (1,221)       (440)
  Minority interest........................        629         741         652
  Other, net...............................      1,153       1,243         (75)
                                            ----------  ----------  ----------
Income (loss) before income taxes and
 extraordinary loss........................     84,949     (34,988)     15,205
Provision for income taxes.................     31,845       8,238       6,386
                                            ----------  ----------  ----------
Income (loss) before extraordinary loss....     53,104     (43,226)      8,819
Extraordinary loss, net of income tax
 benefits of $3,431,000 in 1996............         --      (6,373)         --
                                            ----------  ----------  ----------
Net income (loss)..........................     53,104     (49,599)      8,819
Dividends applicable to preferred stock....         --          --         700
                                            ----------  ----------  ----------
Net income (loss) applicable to common
 stock..................................... $   53,104  $  (49,599) $    8,119
                                            ==========  ==========  ==========
Basic earnings (loss) per common share:
  Income (loss) before extraordinary item.. $     1.22  $    (1.17) $     0.44
  Extraordinary loss.......................         --        (.17)         --
                                            ----------  ----------  ----------
  Net income (loss) per common share....... $     1.22  $    (1.35) $     0.44
                                            ==========  ==========  ==========
Dilutive earnings (loss) per common share:
  Income (loss) before extraordinary item.. $     1.14  $    (1.17) $     0.44
  Extraordinary loss.......................         --        (.17)         --
                                            ----------  ----------  ----------
  Net income (loss) per common share-
   assuming dilution....................... $     1.14  $    (1.35) $     0.44
                                            ==========  ==========  ==========
Weighted average number of common shares
 outstanding:
  Basic.................................... 43,575,458  36,809,126  18,530,338
                                            ==========  ==========  ==========
  Dilutive................................. 46,946,432  36,809,126  18,530,338
                                            ==========  ==========  ==========
</TABLE>
 
                            See accompanying notes.
 
                                      F-3
<PAGE>
 
                                 TUBOSCOPE INC.
 
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
                         AND REDEEMABLE PREFERRED STOCK
 
<TABLE>
<CAPTION>
                               COMMON
                               STOCK           RETAINED   CUMULATIVE  REDEEMABLE
                                $.01  PAID-IN  EARNINGS   TRANSLATION PREFERRED
                                PAR   CAPITAL  (DEFICIT)  ADJUSTMENT    STOCK
                               ------ -------- ---------  ----------- ----------
                                                (IN THOUSANDS)
<S>                            <C>    <C>      <C>        <C>         <C>
Balance, December 31, 1994....  $184  $115,982 $ (1,469)    $(1,273)   $ 10,175
  Common stock issued, 71,171
   shares at an average price
   of $5.59 per share.........     1       397       --          --          --
  Dividends paid during 1995
   ($5.25 per share for Series
   A Convertible Preferred
   Stock), net of December 31,
   1994 accrual...............    --        --     (525)         --        (175)
  Dividends accrued at
   December 31, 1995, ($1.75
   per share for Series A
   Convertible Preferred
   Stock).....................    --        --     (175)         --         175
  Net Income..................    --        --    8,819          --          --
  Translation adjustment......    --        --       --        (500)         --
                                ----  -------- --------     -------    --------
Balance, December 31, 1995....   185   116,379    6,650      (1,773)     10,175
  Common stock issued, 661,697
   shares at an average price
   of $6.86 per share.........     7     4,534       --          --          --
  Common stock issued,
   4,200,000 shares and
   warrants to purchase
   2,533,000 shares of common
   stock for net proceeds of
   $29,100,000................    42    29,058       --          --          --
  Common stock issued in
   merger with Drexel,
   16,704,723 shares at $6.00
   per share and 962,915
   options assumed............   167   101,976       --          --          --
  Common stock issued,
   1,500,000 shares in
   exchange for outstanding
   Series A Convertible
   Preferred Stock and
   warrants to purchase
   1,250,000 shares of common
   stock......................    15     9,985       --          --     (10,000)
  Dividends paid during 1996
   ($1.75 per share for Series
   A Convertible Preferred
   Stock).....................    --        --       --          --        (175)
  Net Loss....................    --        --  (49,599)         --          --
  Translation adjustment......    --        --       --       1,276          --
                                ----  -------- --------     -------    --------
Balance, December 31, 1996....   416   261,932  (42,949)       (497)         --
  Common stock issued, 124,766
   shares in exchange for
   outstanding debt of
   $1,871,490.................     1     1,870       --          --          --
  Common stock issued, 820,698
   shares at an average price
   of $6.71 per share.........     8     5,499       --          --          --
  Common stock issued in
   acquisition of Fiber Glass
   Systems Inc., 1,689,542
   shares at $13.00 per share.    17    21,947       --          --          --
  Tax benefit of options
   exercised..................    --     3,154       --          --          --
  Net Income..................    --        --   53,104          --          --
  Translation adjustment......    --        --       --      (4,469)         --
                                ----  -------- --------     -------    --------
Balance, December 31, 1997....  $442  $294,402 $ 10,155     $(4,966)   $     --
                                ====  ======== ========     =======    ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-4
<PAGE>
 
                                 TUBOSCOPE INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                                                 -----------------------------
                                                   1997      1996       1995
                                                 --------  ---------  --------
                                                       (IN THOUSANDS)
<S>                                              <C>       <C>        <C>
Cash flows from operating activities:
Net income (loss)............................... $ 53,104  $ (49,599) $  8,819
  Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
    Depreciation and amortization...............   26,110     17,606    15,037
    Compensation related to employee 401(K)
     plan.......................................      676        229       239
    Provision (recovery) for losses on accounts
     receivable.................................    2,421        628      (272)
    Provision (recovery) for losses on
     inventory..................................    1,996        329      (275)
    Write-off of long-lived assets..............       --     63,061        --
    Write-off of unamortized debt fees..........       --      2,231        --
    Provision (benefit) for deferred income
     taxes......................................    5,976     (4,894)    3,057
    Pension amortization benefit................     (352)      (485)     (315)
    Changes in current assets and liabilities,
     net of effects from various acquisitions:
      Accounts receivable.......................  (39,339)    (4,374)     (731)
      Inventory.................................  (27,118)    (2,163)   (1,658)
      Prepaid expenses and other................      256     (4,373)     (762)
      Accounts payable, accrued liabilities and
       other....................................   11,319     (7,671)   (2,594)
      Federal and foreign income taxes payable..   11,819       (424)      158
      Pension liabilities.......................     (578)       462       878
                                                 --------  ---------  --------
    Net cash provided by operating activities...   46,290     10,563    21,581
                                                 --------  ---------  --------
Cash flows used for investing activities:
  Capital expenditures..........................  (35,190)   (18,681)   (7,645)
  Proceeds from sale-leaseback transactions.....       --      2,973    12,500
  Business acquisitions, net of cash acquired...  (36,856)   (43,236)   (5,373)
  Other.........................................     (963)    (1,513)     (566)
                                                 --------  ---------  --------
    Net cash used for investing activities......  (73,009)   (60,457)   (1,084)
                                                 --------  ---------  --------
Cash flows provided by (used for) financing
 activities:
  Borrowings under financing agreements, net....   60,567    175,090     1,844
  Principal payments under financing agreements.  (36,428)  (157,244)  (20,825)
  Cash received in Drexel merger................       --      2,101        --
  Debt issuance costs...........................       --       (785)      (95)
  Purchase of foreign currency options..........       --         --      (258)
  Dividends paid on Redeemable Series A
   Convertible Preferred Stock..................       --       (175)     (700)
  Issuance of common stock under employee stock
   plan.........................................      479        128       125
  Net proceeds from sale of common stock........    4,351     31,350        34
                                                 --------  ---------  --------
    Net cash provided by (used for) financing
     activities.................................   28,969     50,465   (19,875)
                                                 --------  ---------  --------
Effect of exchange rate changes on cash.........      (64)       442       241
                                                 --------  ---------  --------
Net increase in cash and cash equivalents.......    2,186      1,013       863
Cash and cash equivalents:
  Beginning of period...........................   10,407      9,394     8,531
                                                 --------  ---------  --------
  End of period................................. $ 12,593  $  10,407  $  9,394
                                                 ========  =========  ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-5
<PAGE>
 
                                TUBOSCOPE INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. NATURE OF BUSINESS AND RISK FACTORS
 
  On April 24, 1996, pursuant to an Agreement and Plan of Merger dated January
3, 1996, the merger of Tuboscope Inc. (the Company) and D.O.S. Ltd. (Drexel)
was consummated (the "Drexel Merger"). The Merger represented the combination
of the largest provider of oilfield-related inspection and coating services in
the world with the world's leading provider of solids control equipment and
services to the oil and natural gas industry and coiled tubing units and
related pressure control equipment to oilfield service companies.
 
  The Company is primarily engaged in the inspection and coating of oil
country tubular goods (drill pipe, line pipe, casing and tubing), the in-place
inspection of oil and gas pipelines, the rental and sale of solids control
equipment and services, and the sale of coiled tubing and pressure control
equipment. All of these services and equipment are sold primarily to the oil
and gas industry. Demand for the Company's inspection services is based, in
part, on the relatively low cost of such services compared to the potential
cost to a customer of the failure of a tubular or pipeline segment. Demand for
the Company's coating services is based on the economic benefits of extending
the life of existing tubulars, reducing the frequency of well workovers, and
reducing interruptions in services and increasing the hydraulic efficiency of
the wells. The Company's Solids Control operations help reduce drilling costs
and minimize the environmental impact of drilling operations by removing rock
cuttings and other solid contaminants from the fluids used in drilling
operations. Coiled tubing equipment provides several economic benefits in oil
and gas workover operations versus conventional techniques, including quicker
service time and the continuous production of the well. Overall, the Company's
results depend to a large extent upon the level of worldwide oil drilling and
production activity, the price of oil and gas, and worldwide oil and gas
inventory levels.
 
  The Company operates in over 54 countries in North America, Latin America,
Europe, Africa, the Middle East, and the Far East. Approximately 51% of the
Company's 1997 revenue was earned outside of North America, and as a result,
the Company's operations 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
movements of funds or result in the deprivation of contract rights or the
taking of property without compensation.
 
  In addition, the Company has significant international customer
concentrations in such countries as Saudi Arabia, Venezuela, Colombia,
Argentina, Indonesia, and Thailand 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.
 
  The Company's common stock became listed on the New York Stock Exchange
under the symbol "TBI" on September 9, 1997. Prior to that date, the Company
was listed on the Nasdaq Stock Market.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 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.
 
 Revenue recognition
 
  The Company recognizes revenue when goods are shipped or when services are
rendered. On large equipment sales which have multiple completion stages and
where the collection of payment is assured, the Company recognizes revenue
under the percentage of completion method.
 
                                      F-6
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Cash and cash equivalents
 
  The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
 
 Accounts receivable
 
  Accounts receivable are net of allowances for doubtful accounts of
approximately $3,560,000, and $2,382,000 in 1997 and 1996, respectively.
 
 Inventory
 
  The Company maintains inventory consisting of equipment components,
subassemblies and expendable parts required to manufacture and support its
tubular inspection equipment, coating facilities, solids control operations,
and coiled tubing/pressure control operations. Equipment under production for
specific sale and lease contracts is also included in equipment components and
parts. Expendable parts are charged to maintenance or supply expense as used.
Components and parts maintained at outlying coating and inspection facilities
are generally not inventoried and are expensed upon issuance. Rehabilitated
equipment and parts are restored to inventory at their net rehabilitation
cost.
 
  Inventory is stated at the lower of cost, as determined by the weighted
moving average method, or market. At December 31, inventory consists of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                                1997     1996
                                                               -------  -------
   <S>                                                         <C>      <C>
   Components, subassemblies and expendable parts............. $52,354  $42,689
   Equipment under production.................................  34,484   13,475
   Inventory reserve..........................................  (8,521)  (8,994)
                                                               -------  -------
     Inventory, net........................................... $78,317  $47,170
                                                               =======  =======
</TABLE>
 
 Property and equipment
 
  Property and equipment is stated at cost. 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
33 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 $19,142,000, $13,118,000, and $10,515,000 for
December 31, 1997, 1996, and 1995, respectively.
 
 Identified intangibles
 
  Identified intangibles 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 $9,998,000 and $9,059,000 at
December 31, 1997 and 1996, respectively. Identified intangibles consist
primarily of technology, patents, trademarks, license agreements, existing
service contracts and covenants not to compete.
 
 Goodwill
 
  Goodwill represents the excess of the purchase price over the fair market
value of the net assets acquired (See Note 3). Such excess costs are being
amortized on a straight-line basis over lives ranging from ten to forty years
depending on the estimated economic life. Accumulated amortization at December
31, 1997 and 1996 was approximately $13,052,000 and $7,771,000 respectively.
 
                                      F-7
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Long-Lived Assets
 
  In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121).
Impairment losses are recognized when indicators of impairment are present and
the estimated discounted cash flows are not sufficient to recover the asset's
carrying amount. Assets held for disposal are measured at the lower of
carrying value or estimated fair value less costs to sell.
 
 Write-Off of Long-Lived Assets
 
  During the first quarter 1996, the Company recorded a write-off of long-
lived assets of $63,061,000 including a writedown of approximately $50,761,000
associated with the Company's adoption of SFAS No. 121 and a decision by
management to sell certain assets, primarily as a result of the Drexel Merger,
which resulted in additional write-downs of approximately $12,300,000.
 
 Accounting for income taxes
 
  Deferred income taxes are recognized for the tax effects of temporary
differences between the financial reported carrying amounts of assets and
liabilities and the income tax amounts.
 
 Derivative Financial Instruments
 
  The Company is not a trader in financial instruments. On occasion, the
Company utilizes various derivative financial instruments, including interest
rate caps, interest rate swap transactions and options to manage its exposure
to interest rate risk and currency fluctuations associated with specific
liabilities and assets, principally debt. Substantially all of the Company's
financial instruments are interest rate transactions. Interest rate swap
transactions involve the receipt of fixed rate interest payments for floating
rate amounts without an exchange of the underlying notional amount.
 
  The Company's objectives for using swap transactions on its debt are to
effectively convert a portion of its floating rate term loans to a fixed rate
and to hedge against the risk of rising interest rates. Expenses associated
with interest rate caps and swap transactions are deferred and recognized as a
component of interest expense over the term of the agreement. At December 31,
1997, the Company had an interest rate cap and various swap transactions in
place (see Note 6).
 
  As a result of having sales and purchases denominated in currencies other
than functional currencies used by the Company's foreign subsidiaries, the
Company is exposed to the effect of foreign exchange rate fluctuations. To the
extent possible, the Company has 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 does not engage in foreign exchange speculation. While forward
contracts affect the Company's results of operations, they do not subject the
Company to uncertainty from exchange rate movements, because gains and losses
on these contracts offset losses and gains on the transactions being hedged.
At December 31, 1997 the Company had no forward foreign exchange contracts
outstanding.
 
  The fair value of the Company's financial instruments which includes cash,
accounts receivable, short-term borrowings, and long-term debt, approximates
their carrying amounts.
 
 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 local currencies.
 
                                      F-8
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  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 operations.
 
 Stock Based Compensation
 
  The Company is permitted to recognize compensation cost related to its stock
based employee compensation plans using either the intrinsic value method or
the fair value method. The Company has elected to continue to use the
intrinsic value method in accounting for its stock based employee compensation
plans, and accordingly, compensation cost for stock options is recognized over
the vesting period only to the extent the market price exceeds the exercise
price on the date of grant.
 
 Earnings per common share
 
  The computation of earnings per common share is based on SFAS No. 128,
"Earnings per Share" (SFAS No. 128), which was issued by the Financial
Accounting Standards Board in 1997. The statement, which was effective for
fiscal years ending after December 15, 1997, replaces the presentation of
primary and fully diluted earnings per common share with a presentation of
basic and diluted earnings per common share. Basic earnings per common share
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. The
Company's diluted earnings per common share is calculated by adjusting the
income available to common stockholders for after-tax interest expense on
convertible debt ($219,000 in 1997 and $0 in 1996 and 1995) and dividing that
number by the weighted average number of common shares plus shares which would
be assumed outstanding assuming conversion of convertible debt, vested stock
options and outstanding stock warrants under the treasury stock method, and
shares to be issued pursuant to earnout provisions. Results for 1996 and 1995
have been restated to be consistent with the 1997 presentation.
 
 Reclassification of prior year amounts
 
  Certain reclassifications of 1996 and 1995 amounts have been made to conform
to the 1997 financial statement presentation.
 
 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.
 
                                      F-9
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
3. ACQUISITIONS
 
  During 1996, the Company began to implement its strategy of executing
consolidating acquisitions and adding related strategic products and services
by completing seven acquisitions, including the Drexel Merger. In 1997, the
Company continued its strategic plan by completing ten acquisitions and two
equity investments.
 
  Each of the acquisitions was 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:
<TABLE>
<CAPTION>
                                                     1997      1996      1995
                                                   --------  ---------  -------
   <S>                                             <C>       <C>        <C>
   Fair value of assets acquired.................. $103,083  $ 257,938  $ 6,373
   Cash paid......................................  (36,856)   (43,890)  (5,373)
   Common stock issued in Drexel Merger...........       --   (102,143)      --
   Common stock issued in other acquisitions......  (21,964)    (1,935)      --
                                                   --------  ---------  -------
     Liabilities assumed and debt issued.......... $ 44,263  $ 109,970  $ 1,000
                                                   ========  =========  =======
</TABLE>
 
   The purchase price of the fiscal 1997 acquisitions exceeded the preliminary
allocation of the fair value of assets acquired by $66,449,000. The purchase
price of the fiscal 1996 acquisitions exceeded the allocation of the fair
value of assets acquired by $105,185,000, principally as a result of the
Drexel Merger.
 
  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 1996. The pro forma information includes certain
adjustments which give effect to amortization of goodwill, interest expense on
acquisition debt 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 1996.
 
<TABLE>
<CAPTION>
                                                               1997     1996
                                                             -------- --------
   <S>                                                       <C>      <C>
   Revenue.................................................. $559,213 $479,458
   Income (loss) before extraordinary loss.................. $ 55,145 $(36,358)
   Net income (loss)........................................ $ 55,145 $(42,731)
   Earnings (loss) per share................................ $   1.17 $  (0.96)
</TABLE>
 
  Excluding the write-off of long-lived assets, the write-off of Italian
operations, the Drexel transaction costs, and the extraordinary loss, pro
forma net income would have been $32,244,000 and pro forma earnings per share
would have been $0.72 in 1996.
 
  A discussion of the significant acquisitions follows for each of the
respective years:
 
 Fiscal 1997
 
  On March 7, 1997, the Company acquired Fiber Glass Systems, Inc. ("FGS"), a
manufacturer of premium fiberglass tubulars used in corrosive oilfield
applications, for an aggregate purchase price of $32,668,270. The purchase
price includes 1,689,542 shares of Common Stock of the Company valued at
$13.00 per share and $906,869 in cash. Approximately $9.8 million of the
purchase price was accrued at December 31, 1997, and such payment is expected
to be made substantially in common stock in the first half of 1998. The
Company also assumed debt of $5,250,000 as part of the acquisition of FGS.
 
  In addition to the acquisition of FGS, the Company completed ten additional
acquisitions and two equity investments for an aggregate purchase price of
$48,675,000 consisting of cash of $35,949,000, notes payable of $4,276,000 and
accrued cash payments of $8,450,000. In addition, the Company assumed debt of
$1,989,000 as part of these acquisitions.
 
 
                                     F-10
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Fiscal 1996
 
  During 1996, the Company executed seven acquisitions, including the Drexel
Merger. Upon consummation of the Drexel Merger, the Company issued 16,704,723
shares of Company Common Stock valued at $102,143,000. In addition, the
Company sold to SCF-III, L.P., a Delaware limited partnership ("SCF"),
4,200,000 shares of Company Common Stock and warrants to purchase 2,533,000
shares of Company Common Stock at an exercise price of $10 per share expiring
on December 31, 2000, for an aggregate purchase price of $31,000,000 (net
proceeds of $29,100,000). Also in connection with the Drexel Merger, Baker
Hughes Incorporated ("Baker Hughes") exchanged all of its 100,000 shares of
Series A Convertible Preferred Stock, par value $.01 per share, of the Company
for 1,500,000 shares of Company Common Stock and warrants to purchase
1,250,000 shares of Company Common Stock at an exercise price of $10 per share
expiring on December 31, 2000. In connection with the Drexel Merger, the
Company recorded $11,306,000 of transaction costs, including severance costs
of former executive officers and consolidation costs of personnel and
facilities.
 
  The Company completed seven additional acquisitions in 1996 for total
consideration of $53,312,000. The consideration included cash of $43,236,000
notes payable of $8,141,000 and 129,967 shares of Company Common Stock valued
at $1,935,000. In addition, the Company assumed debt of $7,493,000 as part of
these acquisitions.
 
 Fiscal 1995
 
  In September 1995, the Company acquired the assets and operations of its
former agent in Argentina for $6,131,000 in cash and the assumption of
$242,000 in debt. The assets purchased included inspection equipment used in
the inspection of oil country tubular goods, sucker rod inspection technology,
and covenant not to compete agreements with the former owners.
 
4. ACCRUED LIABILITIES
 
  At December 31, accrued liabilities consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 1997    1996
                                                                ------- -------
   <S>                                                          <C>     <C>
   Compensation................................................ $14,580 $13,466
   Insurance...................................................   4,678   4,211
   Real estate, sales and other taxes..........................   4,045   3,346
   Payable to sellers for acquisitions.........................  18,247      --
   Other.......................................................  35,046  20,531
                                                                ------- -------
                                                                $76,596 $41,554
                                                                ======= =======
</TABLE>
 
5. INCOME TAXES
 
  The components of income (loss) before income taxes and extraordinary loss
consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                      -------------------------
                                                       1997     1996     1995
                                                      ------- --------  -------
   <S>                                                <C>     <C>       <C>
   Domestic.......................................... $52,769 $(54,022) $(2,610)
   Foreign...........................................  32,180   19,034   17,815
                                                      ------- --------  -------
                                                      $84,949 $(34,988) $15,205
                                                      ======= ========  =======
</TABLE>
 
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 domestic locations. Therefore, the relationship of domestic
and foreign taxes to reported domestic and foreign income is not
representative of actual effective tax rates.
 
                                     F-11
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The provision (benefit) for income taxes before extraordinary loss consists
of the following at December 31 (in thousands):
 
<TABLE>
<CAPTION>
                                                        1997    1996     1995
                                                       ------- -------  -------
   <S>                                                 <C>     <C>      <C>
   Current provision:
     Domestic......................................... $15,996 $ 4,034  $ 2,179
     Foreign..........................................   9,873   9,098    1,150
                                                       ------- -------  -------
       Total current provision........................  25,869  13,132    3,329
                                                       ------- -------  -------
   Deferred provision (benefit):
     Domestic.........................................     934  (5,492)  (2,481)
     Foreign..........................................   5,042     598    5,538
                                                       ------- -------  -------
       Total deferred provision (benefit).............   5,976  (4,894)   3,057
                                                       ------- -------  -------
       Total provision................................ $31,845 $ 8,238  $ 6,386
                                                       ======= =======  =======
</TABLE>
 
  In 1996 the Company recorded a current tax benefit of $3,431,000 related to
the extraordinary loss of $9,804,000. The reconciliation of the expected to
the computed tax provision (benefit) is as follows at December 31 (in
thousands):
 
<TABLE>
<CAPTION>
                                                       1997      1996     1995
                                                      -------  --------  ------
   <S>                                                <C>      <C>       <C>
   Tax expense (benefit) at federal statutory rate... $29,732  $(12,246) $5,322
   Incremental effect of foreign operations..........   1,582     3,729     163
   Nondeductible goodwill amortization...............   1,004       591     266
   Nondeductible write-off of long-lived assets and
    Drexel transaction costs.........................      --    16,071      --
   State income taxes, net of federal benefit........     228       130      33
   Other, net........................................    (701)      (37)    602
                                                      -------  --------  ------
                                                      $31,845  $  8,238  $6,386
                                                      =======  ========  ======
</TABLE>
 
                                     F-12
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1997 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31, DECEMBER 31,
                                                           1997         1996
                                                       ------------ ------------
<S>                                                    <C>          <C>
Gross deferred tax assets:
  Receivables.........................................   $  4,567     $     --
  Domestic and foreign net operating losses...........      1,997        3,276
  Accrued liabilities and other reserves..............      2,310        3,104
  Inventory reserves..................................      3,055        2,791
  Other deferred tax assets...........................        527        1,056
                                                         --------     --------
    Subtotal gross deferred tax assets................     12,456       10,227
  Valuation allowance.................................     (1,651)      (1,171)
                                                         --------     --------
Net deferred tax assets...............................     10,805        9,056
                                                         --------     --------
Gross deferred tax liabilities:
  Property and equipment..............................    (17,194)     (15,012)
  Intangible assets...................................     (1,112)      (1,015)
  Reserve for foreign earnings........................     (6,500)      (4,402)
  Pension liability...................................     (1,142)      (1,290)
  All other...........................................     (6,112)      (1,925)
                                                         --------     --------
Gross deferred tax liabilities........................    (32,060)     (23,644)
                                                         --------     --------
Total net deferred tax liability......................   $ 21,255     $ 14,588
                                                         ========     ========
</TABLE>
 
  The total net deferred tax liability is comprised of $984,000 of net current
tax assets and $22,239,000 net noncurrent deferred tax liabilities.
 
  The Company has undistributed earnings of foreign subsidiaries, as
calculated under the laws of the jurisdiction in which the foreign subsidiary
is located, of approximately $41,754,000 at December 31, 1997. If such
earnings were repatriated, foreign withholding taxes of approximately
$2,370,000 would result. The Company has already recognized and provided
federal income taxes related to the majority of these earnings of its foreign
subsidiaries. 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, 1997 the Company has $2,188,000 of domestic net operating
losses which will be carried forward and will expire between 2007 and 2011.
The Company also has approximately $3,372,000 of foreign net operating loss
carryforwards.
 
  The Company has a valuation allowance of $1,651,000 against these net
operating losses as the Company believes that the corresponding deferred tax
asset may not be fully realizable. The Company's valuation allowance for these
loss carryforwards increased from $1,171,000 at December 31, 1996 to
$1,651,000 at December 31, 1997. This increase is principally related to
current year net operating losses.
 
  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-13
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
6. LONG-TERM DEBT
 
  At December 31, long-term debt consists of the following:
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                                1997     1996
                                                              -------- --------
                                                               (IN THOUSANDS)
<S>                                                           <C>      <C>
$130,000,000 Term Notes payable to lenders, interest at
 6.625% at December 31, 1997. Principal and interest payable
 as described below through August 6, 2002................... $115,282 $130,000
$100,000,000 Revolving Facility expiring August 6, 2001.
 Interest ranging from 6.5% to 6.625% at December 31, 1997
 payable as described below..................................   79,020   28,520
$5,000,000 Unsecured convertible subordinated Promissory
 Notes, interest at 7.0%. Principal and interest payable
 beginning January 31, 1998 and each January 31 thereafter
 through January 31, 2002....................................    5,000    5,000
$5,000,000 Swingline Facility expiring August 6, 2001.
 Interest of 8.5% at December 31, 1997 payable as described
 below.......................................................    2,500    3,000
Other........................................................   16,575   18,223
                                                              -------- --------
Total debt...................................................  218,377  184,743
Less: Current maturities.....................................   30,574   16,514
                                                              -------- --------
  Long-term debt due after one year.......................... $187,803 $168,229
                                                              ======== ========
</TABLE>
 
  Principal payments of long-term debt for years subsequent to 1998 are as
follows (in thousands):
 
<TABLE>
      <S>                                                     <C>
      1999..................................................  $ 29,527
      2000..................................................    30,337
      2001..................................................   113,333
      2002..................................................    12,532
      Thereafter............................................     2,074
                                                              --------
                                                              $187,803
                                                              ========
</TABLE>
 
  On August 6, 1996, the Company's principal subsidiaries entered into a new
Senior Credit Agreement (the "Credit Agreement") with a group of participating
lenders. The agreement included a $130,000,000 advance/term loan facility
("term loans") due over six years, a $100,000,000 revolving credit facility
("revolving loans") due over five years, and a $5,000,000 agent swingline
facility due over six years. These obligations are guaranteed by the Company
and listed subsidiaries of the Company, and secured by the stock pledge of
listed subsidiaries of the Company. Proceeds from these loans were used to
retire the debt balances outstanding under the previous senior credit
agreement, to finance growth and acquisitions, and to retire in the fourth
quarter 1996 the $75,000,000 10 3/4% Senior Subordinated Notes ("the Notes")
of the Company. In connection with the retirement of the Notes, the Company
recorded a before tax extraordinary charge of approximately $9,804,000
($6,373,000 after tax), consisting of $2,231,000 of unamortized debt cost and
$7,573,000 of premium and other cash costs paid on redemption.
 
  The revolving loans and the swingline facility may be repaid in whole or in
part, at any time prior to August 6, 2001. At December 31, 1997 the Company
had outstanding letters of credit amounting to approximately $4,494,400 and an
available facility of approximately $16,485,600 on the $100,000,000 revolving
line of credit. Outstanding letters of credit on the Swingline were
approximately $1,236,202 and availability under the facility was $1,263,798.
The outstanding balance on the term loans became fixed on June 30, 1997. The
term loan facility requires quarterly installments through August 6, 2002.
Mandatory prepayment is required when the Company generates excess cash flow
as defined, or upon transfer of certain assets. An excess cash flow payment of
$4,968,000 was made on December 31, 1997.
 
                                     F-14
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Interest rates for the revolving and term loans, at the option of the
Company, are stated in either the lenders announced fluctuating commercial
base rate or a Eurodollar rate plus an applicable margin ranging from 0.450%
to 0.875%. Commitment fees on the unused revolving and term loan balances
range from 0.175% to 0.375%. Interest is payable on all notes at calendar
quarter end for base rate borrowing and on the earlier of the interest period
or three months from inception for LIBOR rate borrowings. The credit agreement
requires interest rate protection agreements be maintained on at least 50% of
the term loan outstanding balance, for not less than three years.
 
  The Company actively monitors its interest rate exposure by entering into
interest rate swap, cap, floor, and collar agreements to reduce the impact of
changes in interest rates on its floating rate debt. The Company entered into
two interest rate swap transactions on October 31, 1996 in notional amounts of
$25,000,000 each ("Swap1"), effective February 13, 1997, and expiring February
13, 1999, with the issuer (ABN Amro Bank N.V. for one swap and The Chase
Manhattan Bank, the other) ("the counterparties") having the option to extend
the termination date to February 13, 2000. In addition, on December 27, 1996
the Company entered into two additional swap transactions with the same
counterparties with notional amounts of $20,000,000 each, ("Swap2"), effective
February 13, 1997 and expiring February 14, 2000. The Company also entered
into a $40,000,000 zero cost collar agreement with ABN Bank N.V. on May 14,
1997.
 
  The swap transactions and collar are used to hedge $130,000,000 of the
Company's variable interest rate risk. Swap 1 sets a fixed rate of 5.82% for
the swap transaction with ABN Amro and 5.81% for the swap transaction with the
Chase Manhattan Bank. Swap 2 sets a fixed rate for both swap transactions at
6.14%. The total interest rate for the Company will include the fixed rate for
all swap transactions plus a margin as defined in the term loan agreement. The
counterparties to the contract will pay the Company based on USD-LIBOR-BBA at
the set date (February 13, 1997), and this will be reset each six months until
termination. The swap transactions can be canceled by the Company paying a
cancellation fee based upon prevailing market conditions and remaining life of
the agreement.
 
  The $40,000,000 Collar Agreement requires the counterparty to pay the
Company if Libor exceeds 7.77% at each six month reset period. The payment due
the Company is calculated by multiplying the notional amount by the portion of
the rate which is greater than 7.77%. If Libor is less than 5.95%, the Company
pays the counterparty the notional amount multiplied by the amount the rate is
less than 5.95% at the six month reset period. This effectively establishes a
Libor ceiling at 7.77% on $40,000,000 of the Company's variable rate debt.
 
  The Company contracts with investment grade counterparties to these
contracts and monitors overall credit risk and exposure related to all
counterparties. The Company does not anticipate non-performance by any
counterparties and exposure is generally limited to any unrealized gains in
the contracts. Gains and losses on interest cap and swap transactions are
recognized as a component of interest expense in the same period as the
underlying transactions.
 
  The estimated fair value (obtained through independent confirmation) of the
swap and collar transactions at December 31, 1997 were as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                                      1997
                                                                 --------------
                                                        NOTIONAL CARRYING FAIR
                        COUNTERPARTY                     AMOUNT   AMOUNT  VALUE
                        ------------                    -------- -------- -----
      <S>                                               <C>      <C>      <C>
      ABN AMRO......................................... $25,000     --    $ (48)
      ABN AMRO......................................... $20,000     --    $(102)
      CHASE BANK....................................... $25,000     --    $ (43)
      CHASE BANK....................................... $20,000     --     (104)
      ABN AMRO......................................... $40,000     --    $(233)
</TABLE>
 
                                     F-15
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Total debt includes $9,982,104 of promissory notes to former owners of
businesses acquired who remain employed by the Company.
 
  The Credit Agreement restricts the Company from paying dividends on its
capital stock until all mandatory prepayments have been made from excess cash
flow (as defined in the Credit Agreement) and the total funded debt to capital
ratio (as defined in the Credit Agreement) is not greater than 40%. The
Company's total funded debt to capital ratio (calculated as defined under the
agreement) was 42.5% at December 31, 1997. The credit agreement also contains
financial covenants with respect to interest coverage ratio, total funded debt
to capital ratio, and a minimum net worth. The Company believes it is in
compliance with all covenants in the credit agreement at December 31, 1997.
 
  Subsequent to December 31, 1997, the Company reached an agreement in
principle to amend the Credit Agreement with a group of participating lenders.
The Credit Agreement, as amended, will rank pari passu with all existing and
future senior unsecured obligations of the Company. The agreement, as amended,
will include a $130,000,000 advance/term loan facility due over six years, a
$100,000,000 revolving credit facility due over five years and a $5,000,000
swingline facility due over five years. The Credit Agreement, as amended, will
be guaranteed by the Company's material United States subsidiaries. All
outstanding stock pledges of the Company's subsidiaries under the Credit
Agreement will be released in connection with the amendment to the Credit
Agreement, although the participating lenders under the amended agreement will
be able to request stock pledges from material direct foreign subsidiaries.
Under the Credit Agreement, as amended, unlike the current Credit Agreement,
the Company will not be required to make mandatory prepayments out of excess
cash flow.
 
  The Company currently intends to issue approximately $100.0 million of
senior notes due 2008 ("Notes"). The Notes are expected to be fully and
unconditionally guaranteed, on a joint and several basis, by certain direct
wholly-owned subsidiaries of the Company (collectively "Guarantor
Subsidiaries" and individually "Guarantor"). Each of the guarantees is
expected to be an unsecured obligation of the Guarantor and will rank pari
passu with the guarantees provided by and the obligations of such Guarantor
Subsidiaries under the Bank Credit Facility 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. The
net proceeds from the issuance of the Notes are expected to be used by the
Company to repay indebtedness outstanding under the Company's Credit
Agreement, to finance future acquisitions and for working capital and general
corporate purposes. There can be no assurance that the Company will complete
an issuance of the Notes on the terms described above, or at all.
 
7. COMMON STOCKHOLDERS' EQUITY
 
  A stockholder approved stock option plan reserves and authorizes the grant
of options to purchase up to 3,990,952 shares of common stock to officers and
key employees of the Company and 200,000 shares for non- employee members of
the Board of Directors. Prior to January 1, 1997, options granted were
generally exercisable in installments over five year periods. The options
granted in 1997 are exercisable in installments over three year periods
starting one year from the date of grant and generally expire ten years from
the date of grant.
 
                                     F-16
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following summarizes options activity:
 
<TABLE>
<CAPTION>
                                               YEARS ENDED DECEMBER 31,
                                          -------------------------------------
                                             1997         1996         1995
                                          -----------  -----------  -----------
   <S>                                    <C>          <C>          <C>
   Shares under option at beginning of
    year................................    2,200,670    1,505,624    1,325,653
   Drexel Merger grants.................           --      962,915           --
   Granted..............................      363,306      183,200      245,000
   Canceled.............................      (47,398)      (3,339)     (55,096)
   Exercised............................     (748,732)    (447,730)      (9,933)
                                          -----------  -----------  -----------
   Shares under option at end of year...    1,767,846    2,200,670    1,505,624
                                          -----------  -----------  -----------
   Average price of outstanding options.  $      7.35  $      5.71  $      6.45
                                          ===========  ===========  ===========
   Price range of options outstanding...  $.32-$28.75  $.32-$12.75  $.32-$6.875
                                          ===========  ===========  ===========
   Exercisable at end of year...........      887,171    1,412,732      772,374
                                          ===========  ===========  ===========
   Options available for grant at end of
    year................................    1,188,222    1,504,130      455,333
                                          ===========  ===========  ===========
</TABLE>
 
  Substantially all outstanding options were priced between $3.55 and $14.00
per share at December 31, 1997. The weighted average of the remaining
contractual life for the outstanding options at December 31, 1997 was 5.7
years. The weighted average fair value of options granted during 1997 and 1996
was $5.32 and $2.83, respectively. Assuming that the Company had accounted for
its stock-based employee compensation plans using the alternative fair value
method of accounting under SFAS No. 123, "Accounting for Stock-Based
Compensation" and amortized the fair value to expense over the options'
respective vesting periods, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below (in
thousands):
 
<TABLE>
<CAPTION>
                                                               1997     1996
                                                              ------- --------
   <S>                                                        <C>     <C>
   Net Income (loss):
     As reported............................................. $53,104 $(49,599)
                                                              ======= ========
     Pro forma SFAS 123...................................... $52,663 $(49,909)
                                                              ======= ========
   Diluted Earnings (loss) per share:
     As reported............................................. $  1.14 $  (1.35)
                                                              ======= ========
     Pro forma SFAS 123...................................... $  1.13 $  (1.36)
                                                              ======= ========
</TABLE>
 
  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 1997
and 1996, respectively; risk free interest rates of 5.5% for both years;
expected lives of contracts of 3 and 5 years; and volatility of 48.1 percent
and 47.1 percent.
 
  At the 1993 Annual Meeting of Stockholders, the stockholders approved a
qualified stock purchase plan within the meaning of Section 423(b) of the
Internal Revenue Code of 1986. As part of such plan, a maximum of 100,000
shares of the Company's common stock was authorized to be sold. The plan was
activated in 1994, and 41,288, 20,042, and 24,179, shares were issued at an
average price of $11.58 per share, $6.37 per share, and $5.16 per share in
1997, 1996, and 1995, respectively.
 
  In 1997 the Company established the Executive Stock Match Program (SMP) for
certain executive and key employees. Based on certain formulas, the Company
agreed to match stock ownership of these employees as of
 
                                     F-17
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
June 30, 1997. The total shares to be matched were 342,327 shares with a value
of $6,805,461. This compensation cost is being amortized over the vesting life
associated with the plan of ten years. All matched stock will be held by the
Company until the earlier of 100% vesting by the employee, the expiration of
the SMP, or termination of employment from the Company. The matched stock will
also vest 100% due to a change in control of the Company.
 
8. RETIREMENT AND OTHER BENEFIT PLANS
 
  On May 13, 1988, TVI adopted a defined contribution retirement plan, which
covers substantially all domestic employees. Employees may voluntarily
contribute up to 20% of compensation, as defined, to the plan. The
participants' contributions are matched in common stock by the Company up to a
maximum of 1 1/2% of compensation. Contributions were approximately $676,000
(31,915 shares at an average transfer price of $21.17), $229,000 (20,537
shares at an average transfer price of $11.13), and $239,000 (36,680 shares at
an average transfer price of $6.51) for 1997, 1996, and 1995 respectively.
 
  The Company has two defined benefit pension plans in Germany covering
substantially all full-time employees. 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, 1997, 1996, and 1995 (in thousands):
 
<TABLE>
<CAPTION>
                                                            1997   1996   1995
                                                            -----  -----  -----
   <S>                                                      <C>    <C>    <C>
   Service cost............................................ $ 225  $ 260  $ 292
   Interest cost...........................................   522    561    564
   Net amortization........................................  (352)  (485)  (315)
                                                            -----  -----  -----
     Pension expense....................................... $ 395  $ 336  $ 541
                                                            =====  =====  =====
</TABLE>
 
  The following table sets forth the amounts recognized in the Company's
consolidated balance sheets (in thousands):
 
<TABLE>
<CAPTION>
                                                                   1997   1996
                                                                  ------ ------
   <S>                                                            <C>    <C>
   Actuarial present value of benefit obligations:
     Vested...................................................... $6,689 $7,162
     Non-Vested..................................................    268    296
                                                                  ------ ------
   Accumulated benefit obligation................................  6,957  7,458
   Additional amounts related to projected pay increases.........    507    556
                                                                  ------ ------
   Total projected benefit obligations...........................  7,464  8,014
   Unrecognized net gain.........................................  1,609  1,961
                                                                  ------ ------
   Pension liability.............................................  9,073  9,975
   Less--amount included in current liabilities..................    157    129
                                                                  ------ ------
   Noncurrent portion of pension liability....................... $8,916 $9,846
                                                                  ====== ======
</TABLE>
 
  The rate of increase in future compensation levels used in determining the
projected benefit obligations was 2% for December 31, 1997 and 1996, and 3%
for December 31, 1995. The discount rate was 7% for December 31, 1997, 1996,
and 1995. The unrecognized net gain from the change in projected compensation
levels is being amortized over ten years.
 
 
                                     F-18
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
9. 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 2049. 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 $15,437,000,
$12,940,000, and $8,258,000 in 1997, 1996, and 1995, respectively.
 
  Future minimum lease commitments under noncancelable operating leases with
initial or remaining terms of one year or more at December 31, 1997 are
payable as follows (in thousands):
 
<TABLE>
   <S>                                                                  <C>
   1998................................................................ $ 9,721
   1999................................................................   7,000
   2000................................................................   5,926
   2001................................................................   4,722
   2002................................................................   3,406
   Thereafter..........................................................   9,259
                                                                        -------
     Total future lease commitments.................................... $40,034
                                                                        =======
</TABLE>
 
10. CONSOLIDATED STATEMENT OF CASH FLOWS
 
  During 1997 the Company issued 124,766 shares of common stock to retire
approximately $1,871,000 of outstanding notes related to the acquisition of
SSR. During 1996 the Company issued 1,500,000 shares of common stock and
warrants to purchase 1,250,000 shares of common stock at an exercise price of
$10.00 per share in exchange for all of the Company's 100,000 shares of Series
A Convertible Preferred Stock, par value $.01 per share. Dividends accrued on
preferred stock were $175,000 in 1995.
 
  Supplemental disclosure of cash flow information (in thousands):
 
<TABLE>
<CAPTION>
                                                         1997    1996    1995
                                                        ------- ------- -------
   <S>                                                  <C>     <C>     <C>
   Cash paid during the period for:
     Interest.......................................... $12,876 $14,836 $12,978
                                                        ======= ======= =======
     Taxes (net of refunds)............................ $13,629 $ 9,749 $ 3,306
                                                        ======= ======= =======
</TABLE>
 
                                     F-19
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
11. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
 
  Information about the Company's operations in various geographic areas is
presented below. The Company's areas of operation outside the United States
are grouped into six geographic areas, representative of the major markets
served. Revenue from unaffiliated customers represents total net revenue from
the respective areas after elimination of inter-geographic transactions. U.S.
exports are shown with the corresponding destination of the product or
service. Operating profit (loss) represents revenue less operating costs and
expenses corresponding to the specific geographic areas. Identifiable assets
are those assets used in the geographic areas listed and reflect eliminations
of inter-geographic balances.
 
<TABLE>
<CAPTION>
                          UNITED                       FAR    MIDDLE    LATIN      OTHER
                          STATES   CANADA   EUROPE    EAST     EAST    AMERICA INTERNATIONAL CONSOLIDATED
                         --------  ------- --------  -------  -------  ------- ------------- ------------
                                                        (IN THOUSANDS)
<S>                      <C>       <C>     <C>       <C>      <C>      <C>     <C>           <C>
YEAR ENDED 12/31/97:
Total revenue:
  Unaffiliated
   customers............ $276,651  $49,146 $ 85,144  $23,586  $21,259  $67,190    $ 2,255      $525,231
  U.S. export sales.....  (80,647)  11,008   18,084    8,213    4,851   27,899     10,592            --
                         --------  ------- --------  -------  -------  -------    -------      --------
TOTAL................... $196,004  $60,154 $103,228  $31,799  $26,110  $95,089    $12,847      $525,231
                         ========  ======= ========  =======  =======  =======    =======      ========
Operating profit........ $ 17,719  $21,257 $ 20,825  $ 8,080  $ 4,395  $26,447    $ 2,202      $100,925
                         ========  ======= ========  =======  =======  =======    =======      ========
Identifiable assets..... $448,916  $57,042 $ 85,687  $21,122  $10,498  $62,802    $   100      $686,167
                         ========  ======= ========  =======  =======  =======    =======      ========
YEAR ENDED 12/31/96:
Total revenue:
  Unaffiliated
   customers............ $167,826  $26,013 $ 70,703  $19,061  $15,830  $41,636    $   362      $341,431
  U.S. export sales.....  (48,451)   3,052   11,253    4,530    5,867   10,610     13,139            --
                         --------  ------- --------  -------  -------  -------    -------      --------
TOTAL................... $119,375  $29,065 $ 81,956  $23,591  $21,697  $52,246    $13,501      $341,431
                         ========  ======= ========  =======  =======  =======    =======      ========
Operating profit........ $(29,699) $ 9,394 $ (4,639) $(3,097) $(6,879) $11,470    $ 2,169      $(21,281)
                         ========  ======= ========  =======  =======  =======    =======      ========
Identifiable assets..... $243,594  $43,108 $111,049  $27,018  $17,272  $58,100    $ 5,024      $505,165
                         ========  ======= ========  =======  =======  =======    =======      ========
YEAR ENDED 12/31/95:
Total revenue:
  Unaffiliated
   customers............ $ 92,928  $13,664 $ 47,722  $15,785  $13,613  $ 5,795    $   508      $190,015
  U.S. export sales.....  (12,481)      14    1,111    2,920       30    4,110      4,296            --
                         --------  ------- --------  -------  -------  -------    -------      --------
TOTAL................... $ 80,447  $13,678 $ 48,833  $18,705  $13,643  $ 9,905    $ 4,804      $190,015
                         ========  ======= ========  =======  =======  =======    =======      ========
Operating profit........ $  3,463  $ 5,383 $  7,764  $ 4,939  $ 1,721  $ 3,294    $   896      $ 27,460
                         ========  ======= ========  =======  =======  =======    =======      ========
Identifiable assets..... $156,733  $12,356 $ 90,567  $27,881  $ 9,892  $ 8,510    $   740      $306,679
                         ========  ======= ========  =======  =======  =======    =======      ========
</TABLE>
 
 
                                     F-20
<PAGE>
 
                                TUBOSCOPE INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
  Summarized quarterly financial information for 1997, 1996 and 1995 is as
follows:
 
<TABLE>
<CAPTION>
                                                                 BASIC   DILUTIVE
                                                                EARNINGS EARNINGS
                                                                 (LOSS)   (LOSS)
                                           OPERATING    NET       PER      PER
                                            PROFIT     INCOME    COMMON   COMMON
                                  REVENUE   (LOSS)     (LOSS)    SHARE    SHARE
                                  -------- ---------  --------  -------- --------
                                    (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S>                               <C>      <C>        <C>       <C>      <C>
1997
 First Quarter................... $105,501 $ 18,174   $  8,599   $ 0.20   $ 0.19
 Second Quarter..................  125,995   25,154     12,947     0.30     0.28
 Third Quarter...................  141,411   27,780     15,037     0.34     0.32
 Fourth Quarter..................  152,324   29,817     16,521     0.37     0.34
                                  -------- --------   --------   ------   ------
   Total Year.................... $525,231 $100,925   $ 53,104   $ 1.22   $ 1.14
                                  ======== ========   ========   ======   ======
1996
 First Quarter................... $ 47,018 $(57,244)  $(55,589)  $(2.97)  $(2.97)
 Second Quarter..................   94,643    4,910     (1,187)   (0.02)   (0.02)
 Third Quarter...................   94,672   15,405      6,796     0.16     0.16
 Fourth Quarter..................  105,098   15,648        381     0.01     0.01
                                  -------- --------   --------   ------   ------
   Total Year.................... $341,431 $(21,281)  $(49,599)  $(1.35)  $(1.35)
                                  ======== ========   ========   ======   ======
1995
 First Quarter................... $ 43,686 $  4,661   $  1,042   $ 0.05   $ 0.05
 Second Quarter..................   45,652    5,784      1,872     0.09     0.09
 Third Quarter...................   47,067    7,012      2,002     0.10     0.10
 Fourth Quarter..................   53,610   10,003      3,903     0.20     0.20
                                  -------- --------   --------   ------   ------
   Total Year.................... $190,015 $ 27,460   $  8,819   $ 0.44   $ 0.44
                                  ======== ========   ========   ======   ======
</TABLE>
 
  The first three quarters of 1997, 1996, and 1995 per share amounts have been
restated to comply with SFAS No. 128 (See Note 2).
 
  The fourth quarter 1996 results included an extraordinary charge of
$6,373,000 (net of $3,431,000 tax benefit) related to the early retirement of
the Company's $75,000,000 Senior Subordinated Notes. In addition, the fourth
quarter 1996 results included a $2,234,000 write-off of Italian assets. The
second quarter 1996 results included $11,206,000 of Drexel transaction costs
related primarily to severance costs for former executive officers of the
Company and consolidation costs associated with the Tuboscope operations. The
first quarter 1996 results included the write-off of long-term assets of
$63,061,000 associated with the adoption of SFAS No. 121 and the decision by
management to sell certain assets.
 
                                     F-21
<PAGE>
 
                                                                      SCHEDULE I
 
                                 TUBOSCOPE INC.
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                            CONDENSED BALANCE SHEETS
                             (PARENT COMPANY ONLY)
 
                           DECEMBER 31, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                            ------------------
                          ASSETS                              1997      1996
                          ------                            --------  --------
                                                              (IN THOUSANDS)
<S>                                                         <C>       <C>
Cash....................................................... $     --  $      9
Accounts receivable........................................      522        17
Investment in subsidiaries.................................  317,955   228,502
                                                            --------  --------
    Total assets........................................... $318,477  $228,528
                                                            ========  ========
<CAPTION>
                  LIABILITIES AND EQUITY
                  ----------------------
<S>                                                         <C>       <C>
Accrued liabilities........................................ $  9,797  $     --
Amounts due to affiliates..................................    8,647     7,068
Interest payable...........................................       --        45
Notes payable..............................................       --     2,513
Common stockholders' equity:
  Common stock, $.01 par value 60,000,000 shares
   authorized, 44,235,591 shares issued and outstanding
   (41,612,495 at December 31, 1996).......................      442       416
  Paid-in capital..........................................  294,402   261,932
  Retained earnings (deficit)..............................   10,155   (42,949)
  Cumulative translation adjustment........................   (4,966)     (497)
                                                            --------  --------
    Total common stockholders' equity......................  300,033   218,902
                                                            --------  --------
    Total liabilities and equity........................... $318,477  $228,528
                                                            ========  ========
</TABLE>
 
 
                  See notes to condensed financial statements.
 
                                      S-1
<PAGE>
 
                                                                      SCHEDULE I
 
                                 TUBOSCOPE INC.
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                       CONDENSED STATEMENTS OF OPERATIONS
                             (PARENT COMPANY ONLY)
 
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                      -------------------------
                                                       1997      1996     1995
                                                      -------  --------  ------
                                                          (IN THOUSANDS)
<S>                                                   <C>      <C>       <C>
Equity in net earnings (loss) of subsidiaries........ $53,181  $(49,326) $8,874
Interest expense.....................................      --       (45)     --
Foreign exchange gain (loss).........................      43      (171)     --
State franchise tax and other........................    (120)      (57)    (55)
                                                      -------  --------  ------
Net income (loss)....................................  53,104   (49,599)  8,819
Dividends applicable to redeemable preferred stock...      --        --     700
                                                      -------  --------  ------
Net income (loss) applicable to common stock......... $53,104  $(49,599) $8,119
                                                      =======  ========  ======
</TABLE>
 
 
 
 
                  See notes to condensed financial statements.
 
                                      S-2
<PAGE>
 
                                                                      SCHEDULE I
 
                                 TUBOSCOPE INC.
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                       CONDENSED STATEMENTS OF CASH FLOWS
                             (PARENT COMPANY ONLY)
 
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                    ---------------------------
                                                      1997      1996     1995
                                                    --------  --------  -------
                                                         (IN THOUSANDS)
<S>                                                 <C>       <C>       <C>
Cash flows from operating activities:
  Net income (loss)...............................  $ 53,104  $(49,599) $ 8,819
  Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
    Equity in net (earnings) loss of subsidiaries.   (53,181)   49,326   (8,874)
    Changes in current assets and liabilities:
      Accounts receivable.........................      (505)      (17)      --
      Accrued liabilities.........................     9,797        --       --
      Interest payable............................       (45)       45       --
      Amounts due to affiliates...................     1,579     6,179      357
                                                    --------  --------  -------
  Net cash provided by operating activities.......    10,749     5,934      302
                                                    --------  --------  -------
Cash flows used for investing activities:
  Investment in subsidiaries......................   (16,264)  (37,466)      --
                                                    --------  --------  -------
Cash flows provided by (used for) financing activ-
 ities:
  Proceeds from sale of common stock..............     5,506    31,707      398
  Dividends paid on Redeemable Series A
   Convertible Preferred Stock....................        --      (175)    (700)
                                                    --------  --------  -------
  Net cash provided by (used for) financing
   activities.....................................     5,506    31,532     (302)
                                                    --------  --------  -------
Net change in cash and cash equivalents...........        (9)       --       --
Cash and cash equivalents:
  Beginning of the year...........................         9         9        9
                                                    --------  --------  -------
  End of the year.................................  $     --  $      9  $     9
                                                    ========  ========  =======
</TABLE>
 
 
                  See notes to condensed financial statements.
 
                                      S-3
<PAGE>
 
                                                                     SCHEDULE I
 
                                TUBOSCOPE INC.
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
 
                       DECEMBER 31, 1997, 1996, AND 1995
 
  No cash dividends were paid to Tuboscope Vetco International Corporation.
 
  For information concerning restrictions pertaining to the common stock and
commitments and contingencies, see Notes 7 and 9 of notes to consolidated
financial statements of Tuboscope Vetco International Corporation.
 
                                      S-4
<PAGE>
 
                                                                     SCHEDULE II
 
                                 TUBOSCOPE INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
                 YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
 
<TABLE>
<CAPTION>
                                                  ADDITIONS
                                                 (DEDUCTIONS) CHARGE
                                        BALANCE   CHARGED TO   OFFS    BALANCE
                                       BEGINNING  COSTS AND     AND    END OF
                                        OF YEAR    EXPENSES    OTHER    YEAR
                                       --------- ------------ -------  -------
                                                   (IN THOUSANDS)
<S>                                    <C>       <C>          <C>      <C>
Allowance for doubtful accounts:
  1997................................  $2,382      $2,421    $(1,243) $3,560
  1996................................  $  955      $  628    $   799  $2,382
  1995................................  $1,599      $ (272)   $  (372) $  955
Allowance for inventory reserves:
  1997................................  $8,994      $1,996    $(2,469) $8,521
  1996................................  $5,988      $  329    $ 2,677  $8,994
  1995................................  $6,272      $ (275)   $    (9) $5,988
Valuation allowance for deferred
 income taxes:
  1997................................  $1,171      $  480    $    --  $1,651
  1996................................  $3,404      $   --    $(2,233) $1,171
  1995................................  $1,310      $2,119    $   (25) $3,404
</TABLE>
 
                                      S-5