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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-K



(Mark
One)

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



For the fiscal year ended December 31, 2003



OR



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



For the transition period from
 to



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VARCO INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)



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



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



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



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



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



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



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ̈



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



The aggregate market value of the voting stock held by non-affiliates of the registrant, as of the registrants most
recently completed second fiscal quarter, was $1,820,227,284 based on the closing sales price of such stock on such date.



The number of shares outstanding of the registrants common stock, as of February 20, 2004 was 97,173,094.



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DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants Proxy Statement for its 2004 Annual Meeting are incorporated by this reference into Part III, as set forth herein.



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ITEM 1.     BUSINESS



General



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



The Companys common stock is traded on the New York Stock Exchange under the symbol VRC. The Company
operates through four business groups: Drilling Equipment Group, Tubular Services, Drilling Services, and Coiled Tubing & Wireline Products.



The Drilling Equipment Group manufactures and sells integrated systems and equipment for rotating and handling pipe on offshore and land drilling rigs,
including conventional drilling rig tools and equipment; pipe handling tools; hoisting and rotary equipment; pressure control and motion compensation equipment; and flow devices. The group also provides after-market service and sales of spares parts
for its drilling equipment. Customers include onshore and offshore drilling contractors, major oil and gas companies, independent producers, national oil companies, and oilfield distributors.



The Tubular Services group provides internal coating products and services,
inspection services, and quality assurance services for oil country tubular goods. Oil country tubular goods (OCTG) include drill pipe, tubing, casing and flowlines. Additionally, this group sells and rents proprietary equipment used to
inspect tubular products at steel mills, and designs, manufactures and sells corrosion-resistant high pressure fiberglass and composite tubular goods for both oilfield and industrial applications. The Tubular Services group also provides technical
inspection services and quality assurance services for in-service pipelines used to transport oil and gas. Customers include major oil and gas companies, independent producers, national oil companies, drilling contractors, oilfield supply stores,
industrial plant operators, pipeline operators, and steel mills.



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



The Coiled Tubing & Wireline Products group designs, manufactures, and sells highly-engineered coiled tubing, coiled tubing units and related equipment as well as pressure control equipment and equipment used in
pressure pumping and wireline operations. These products are used in oil and gas well drilling, completion and remediation operations. Customers include oil and gas coiled tubing service companies, pressure pumping companies, national oil companies
as well as major oil companies and independent producers.



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



|                                  |  |                          |           |      |   |           |  |   |          
|--------------------------------- |  | ------------------------ | --------- | ---- | - | --------- |  | - | ---------
|                                  |  | Years Ended December 31,
|                                  |  | 2003                     |           | 2002 |   | 2001     
|                                  |  | (in thousands)          
|Drilling Equipment Group          |  | $                        | 474,173   |      | $ | 486,695   |  | $ | 395,550  
|Tubular Services                  |  |                          | 455,898   |      |   | 355,966   |  |   | 352,624  
|Drilling Services                 |  |                          | 292,663   |      |   | 278,617   |  |   | 314,272  
|Coiled Tubing & Wireline Products |  |                          | 226,873   |      |   | 213,786   |  |   | 205,363  
|                                  |  |                          |           |      |   |           |  |   |          
|Total                             |  | $                        | 1,449,607 |      | $ | 1,335,064 |  | $ | 1,267,809
|                                  |  |                          |           |      |   |           |  |   |          



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



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



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



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



Approximately 51% of the Companys Drilling Equipment Group business groups revenues are determined by the capital expenditures of drilling
contractors and oil companies on equipment for new drilling rig fabrication or drilling rig refurbishment projects. Capital expenditures are influenced by cash flows these contractors generate from drilling activity, but also by the availability of
financing, the outlook for future drilling activity, and other factors. Generally the Company believes the demand for more drilling capital equipment lags increases in the level of drilling activity. Approximately 49% of the Drilling Equipment
revenue in 2003 was related to the sale of drilling equipment spare parts and consumables, the provision of equipment-repair services, and the rental of drilling equipment, which the Company believes are generally determined directly by the level of
drilling activity.



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



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The Companys Drilling Services business group revenues are closely tied to drilling activity,
although a portion (approximately 13%) of Drilling Services revenues are related to the sale of capital equipment to drilling contractors, which is indirectly related to the level of drilling activity. The Companys Drilling Services sales of
consumables, such as shaker screens, and spare parts for its equipment, are generally determined directly by the level of drilling activity in the Companys view.



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



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



Drilling activity was generally high in 2001,
but began to decline in the second half due to lower oil and gas prices. Beginning in late 2002, higher gas prices in the U.S. led to rising gas drilling activity in Canada and most U.S. onshore areas throughout 2003. Higher oil prices led to higher
oil drilling activity levels in 2003 in several international markets, including the Middle East, the Far East and several key Latin American markets. Mexico drilling activity by Pemex (national oil company in Mexico) increased due to significant
increases in Pemexs capital budget to drill new wells. However, other historically important markets for the Company remained slow in 2003, including the Gulf of Mexico, the North Sea, and Venezuela. Markets for the capital equipment the
Company sells generally weakened in 2003 as major pressure pumping and coiled tubing service providers, and offshore drilling contractors curtailed purchases of new equipment and reduced construction of new drilling rigs. Sales of coiled tubing
units and wireline units grew slightly in 2003 as orders from independent pressure pumping companies offset the decline in orders from major companies. Lower capital equipment purchases by drilling contractors in 2003 adversely affected the
Companys Drilling Equipment and Drilling Services businesses, which sell capital equipment used in drilling, and also adversely affected the Companys Tubular Services business, which applies coating to new drillpipe purchased by drilling
contractors from other suppliers.



Oil and Gas Well Drilling and Remediation
Processes



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



During drilling, heavy drilling fluids or drilling muds are pumped down the drill stem and forced out through jets in the bit. The drilling
mud returns to the surface through the hole area surrounding the drill stem,



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carrying with it the drill cuttings drilled out by the bit. The drill cuttings are removed from the mud by a solids control system (which can include
shakers, centrifuges and other specialized equipment) and disposed of in an environmentally sound manner. The solids control system permits the mud, which is often comprised of expensive chemicals, to be continuously reused and recirculated back
into the hole. Through its Drilling Services business, the Company sells and rents solids control equipment, and provides solids control services. Many operators internally coat the drill stem to protect it from corrosive fluids sometimes
encountered during drilling, and inspect and assess the integrity of the drill pipe from time to time. Through its Tubular Services business, the Company provides drillpipe inspection and coating services.



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



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



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



Drilling muds are carefully designed to exhibit certain qualities that optimize the drilling process. In addition to containing formation pressure, they
must (i) cool the drill bit, (ii) carry drilled solids to the surface, and (iii) protect the drilled formations from being damaged. Achieving these objectives often requires a formulation specific to a given well and can involve the use of expensive
chemicals as well as natural materials such as certain types of clay. The fluid itself is often oil or more-expensive synthetic mud. Given this expense, it is highly desirable to reuse as much of the drilling mud as possible. Solids control
equipment such as shale shakers, centrifuges, cuttings dryers, and mud cleaners help accomplish this objective. The Companys Drilling Services group rents, sells, operates and services this equipment. Drilling muds are formulated based on
expected drilling conditions. However, as the hole is drilled, the drill stem may encounter a high pressure zone where the mud density is inadequate to maintain sufficient pressure. Should efforts to weight up the mud in order to contain
such a pressure kick fail, a blowout could result, whereby reservoir fluids would flow uncontrolled into the well. To prevent blowouts to the surface of the well, a series of high-pressure valves known as blowout preventers (BOPs) are
positioned at the top of the well and, when activated, form tight seals that prevent the escape of fluids. When closed, conventional BOPs prevent normal rig operations. Therefore, the BOPs are activated only if drilling mud and normal well control
procedures cannot safely contain the pressure. BOPs have been designed to contain pressure of up to 20,000 psi. The Companys Drilling Equipment business sells several types of BOPs.



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



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



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



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



Drilling Equipment Group



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



In 2003, approximately 21% of the Drilling Equipment
Groups sales were for equipment for newly constructed drilling rigs, 28% were for upgrades and refurbishments of existing rigs, 49% were for aftermarket spares and services, and 2% were for production chokes and other.



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



The TDS combines elements of
pipe handling tools, as well as hoisting and rotary equipment, into a single system. During drilling operations, the TDS performs functions such as making-up joints of drill pipe,



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maneuvering joints of drill pipe into position to be added to the drill stem when drilling, and holding and hoisting the entire drill stem. Drilling with a
TDS provides several advantages over conventional drilling. It enables drilling with three joints of drill pipe, often reducing by two-thirds the time spent in making connections of drill pipe. In addition, it facilitates horizontal and
extended reach drilling (the practice of drilling wells which deviate substantially from vertical) by providing the ability to rotate the pipe as it is removed from, or placed into, the well, thus reducing the likelihood of the drill
stem becoming stuck in the wellborea phenomenon that may occur when drill pipe remains stationary in the wellbore for a prolonged period. By facilitating extended reach drilling, the TDS increases the area which can be drilled from a given
location, such as a fixed platform. Thus, the production from a given reservoir of oil can be increased, and the number of costly fixed platforms required to develop the field can be minimized. Over the past few years the Company began targeting TDS
sales into the land drilling market. Between 2001 and 2003, approximately 145 TDS units, or 77% of total top drive sales, were sold by the Company into land drilling applications.



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



Vertical pipe racking systems are used predominantly on offshore rigs and are found on almost all floating rigs. Mechanical vertical pipe racking systems
greatly reduce the manual effort involved in pipe handling. The Pipe Handling Machine (PHM), introduced by Varco in 1985, provides a fully automated mechanism for handling and racking drill pipe during drilling and tripping operations,
spinning and torquing drill pipe, and automatic hoisting and racking of disconnected joints of drill pipe. These functions are integrated via computer controlled sequencing, and operated by a driller in an environmentally secure cabin. An important
element of this system is the Iron Roughneck, which was originally introduced by Varco in 1976 and is an automated device that makes pipe connections on the rig floor and requires less direct involvement of rig floor personnel in potentially
dangerous operations. The Automated Roughneck is an automated microprocessor-controlled version of the Iron Roughneck. In late 2002 the Company introduced its new ST-80 Iron Roughneck to expand into the land rig market. Through 2003 the Company has
sold approximately 77 units.



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



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



Blow-out Preventers.    BOPs are devices used to
seal the space (annulus) between the drill pipe and the borehole to prevent blow-outs (uncontrolled flows of formation fluids and gases to the surface). The Drilling Equipment Group manufactures BOPs under the Shaffer brand name. Ram and
annular BOPs are back-up devices and are activated only if other techniques for controlling pressure in the wellbore are inadequate. When closed, these devices prevent normal rig operations. Ram BOPs seal the wellbore by hydraulically closing rams
(thick heavy blocks of steel) against each other across the wellbore. Specially designed packers seal around



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specific sizes of pipe in the wellbore, shear pipe in the wellbore or close off an open hole. Annular BOPs seal the wellbore by hydraulically closing a
rubber packing unit around the drill pipe or kelly or by sealing against itself if nothing is in the hole. Varcos Pressure Control While Drilling (PCWD) BOP, introduced in 1995, allows operators to drill at pressures up to 2,000
psi without interrupting normal operations, and can act as a normal spherical BOP at pressures up to 5,000 psi.



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



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



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



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



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



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



Derricks and substructures.    The Company began offering design, fabrication and repair services for derricks and
substructures through its September 2001 acquisition of Morinoak International Ltd., with engineering and fabrication facilities in Great Yarmouth, England and Aberdeen, Scotland. MIL represented the Companys first entrance into the business
of designing and fabricating large drilling rig structural components such as masts and substructures. In 2003 the Company experienced significant cost over runs on a sophisticated land rig it had contracted to supply on a turnkey basis, for a
customer in the Middle East, for approximately



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$31 million. The cost overruns were attributable to errors in the original design of the rig, underestimation of the costs of rig-up and commissioning,
cost due to delays of the project, and adverse foreign currency exchange changes related to the strengthening of the British Pound against the U.S. Dollar. As a result of the losses on the turnkey rig fabrication project, and continuing operating
losses from the MIL business, the Company decided to exit the rig fabrication business of MIL, and expects to close the operation in 2004. The Company expects to incur additional losses associated with this project and with exiting the MIL business
during 2004. In the future the Company expects to avoid turnkey risk on such projects by bidding complete rig packages with other third party structural engineering and fabrication firms.



Service & Spares.    Approximately 49 percent of the sales of the Drilling Equipment Group
consist of spare and replacement parts, consumables, provision of drilling equipment repair services, and rental of drilling systems.



Facilities.    The Company conducts Drilling Equipment manufacturing operations at major facilities in Orange, California;
Houston, Texas; Mexicali, Mexico; and Etten-Leur, Netherlands. The Drilling Equipment Group maintains sales and service offices in most major oilfield markets, either directly or through agents. The Company expanded its market presence in Norway
when it acquired its agent, Scana IOS Desco AS, in December 2000, and expanded its drilling equipment repair business through the acquisition of Church Oil Tools in early 2003.



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



See the Companys Executive Summaryand Drilling Equipment
Group Restructuring andMIL Impairment Charge in Managements Discussion and Analysis of Results of Operations and Financial Condition.



Tubular Services Group



The Companys Tubular Services Group provides a variety of tubular services to oil and gas producers, national oil companys, drilling
contractors, well-remediation service companies, pipeline operators, and tubular processors, manufacturers and distributors. The Tubular Services group provides inspection and reclamation services for drill pipe, casing, production tubing, sucker
rods and line pipe at drilling and workover rig locations, at yards owned by its customers, at steel mills and processing facilities that manufacture tubular goods, and at facilities which it owns. The Tubular Services group also provides for the
internal coating of tubular goods at 12 coating plants worldwide. The Company also conducts tubular coating operations through licensees in certain locations. Additionally, the Company designs, manufactures and sells high pressure fiberglass and
composite tubulars for use in corrosive applications, and provides in-place inspection of oil, gas and product transmission pipelines through its application of instrumented survey tools (smart pigs) which it engineers, manufactures and
operates.



The Companys Tubular Services business was
increased significantly through its acquisition of substantially all of the assets of the oilfield services business of ICO, Inc., including the stock of its Canadian operating subsidiary, on September 6, 2002. The ICO oilfield services business
provides tubular inspection, coating and reclamation; sucker rod inspection and reclamation; tubular transport and logistics management; and beam pump engine repair. Operations are primarily conducted in North America. Since the acquisition the
Company has effected efficiency gains and consolidation savings by combining the oilfield service business of ICO into its original operations.



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



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



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



Fiberglass & Composite
Tubulars.    When compared to conventional carbon steel and even corrosion-resistant alloys, resin-impregnated fiberglass and other modern plastic composites often exhibit superior resistance to corrosion. Some producers
manage the corrosive fluids sometimes found in oil and gas fields by utilizing composite or fiberglass tubing, casing and line pipe in the operations of their fields. In 1997, the Company acquired Fiber Glass Systems, a leading provider of high
pressure fiberglass tubulars used in oilfield applications, to further serve the tubular corrosion prevention needs of its customers. Fiber Glass Systems has manufactured fiberglass pipe since 1968 under the name Star®, and was the first manufacturer of high-pressure fiberglass pipe to be licensed by the API in 1992. The Company acquired two fiberglass and
composite tubing manufacturing facilities in the U.S. and one in China from A.O. Smith in December 2000, acquired another U.S. fiberglass tubing manufacturing facility from Fibercast in July 2001 and acquired a small fiberglass business in China in
early 2004. These acquisitions have extended the Companys fiberglass and composite tubing offering into industrial and marine applications, in addition to its oilfield market.



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



The Tubular Services groups tubular inspection services employ all
major non-destructive inspection techniques, including electromagnetic, ultrasonic, magnetic flux leakage and gamma ray. These inspection services are provided both by mobile units which work at the wellhead as used tubing is removed from a well,
and at fixed site tubular inspection locations. The group provides an ultrasonic inspection service for detecting



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potential fatigue cracks in the end area of used drill pipe, the portion of the pipe that traditionally has been the most difficult to inspect. Tubular
inspection facilities also offer a wide range of related services, such as API thread inspection, ring and plug gauging, and a complete line of reclamation services necessary to return tubulars to useful service, including tubular cleaning and
straightening, hydrostatic testing and re-threading.



In
addition, the Company applies hardbanding material to drillpipe, to enhance its wear characteristics and reduce downhole casing wear as a result of the drilling process. In 2002, the Company introduced its proprietary line of hardbanding material,
TCS8000.



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



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



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



Mill Systems and Sales.    The Company engineers
and fabricates inspection equipment for steel mills, which it sells and rents. The equipment is used for quality control purposes to detect defects in the pipe during the high-speed manufacturing process. Each piece of mill inspection equipment is
designed to customer specifications and is installed and serviced by the Company. Since 1962, the Company has installed more than 80 units worldwide, in most major steel mills. Equipment is manufactured at the Companys Houston, Texas and
Celle, Germany facilities. Revenue for Mill Systems and Sales fluctuates significantly from year to year due to the timing of negotiating large domestic and export sales contracts, arranging financing and manufacturing equipment.



Sucker Rod Inspection & Reclamation.    The
2002 acquisition of the oilfield services business of ICO, Inc. provided the Tubular Services group a significant sucker rod services business. The Tubular Services group cleans, straightens, inspects and coats sucker rods at eleven facilities
throughout the Western Hemisphere. Additionally, new sucker rods are inspected before they are placed into service, to avoid premature failure, which can cause the oil well operator to have to pull and replace the sucker rod. The Company further
strengthened its position in this market with the acquisition of Patco Rod Service, Inc. in California in 2003.



Pipeline Inspection.    In-place inspection services for oil and gas pipelines identify anomalies in pipelines without removing
or dismantling the pipelines or stopping the product flow, giving customers a convenient and cost-effective method of identifying potential defects. The Tubular Services group inspects pipelines by launching a sophisticated survey instrument into
the pipeline. Propelled by the product flow, the instrument uses



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electromagnetics, ultrasonics, and mechanical measurements received on digital and analog media to monitor the severity and location of internal and external
pitting-type corrosion as well as other mechanical anomalies in the pipeline, providing a basis for evaluation and repair by the customer. Once the test is complete, the survey instrument is returned to the Company, refurbished and used for future
pipeline inspections.



Management believes the major
competitive factors for Pipeline Services are reputation for quality, service, reliability of obtaining a successful survey on the first run, product technology, price, and technical support on survey interpretation. Demand for the Companys
pipeline services is somewhat dependent on commodity prices, which affect funds available for discretionary pipeline inspection and maintenance expenditures by many pipeline operators. This dependence is most pronounced in international markets.
Additionally, significant consolidation in the pipeline industry has caused many pipeline operators to defer inspections in recent years as they re-evaluate their pipeline maintenance programs following mergers and acquisitions.



Management believes there are growth opportunities for the Companys
Pipeline Services due to the aging of the worldwide pipeline network, construction of new pipelines, and recent changes in U.S. regulatory requirements. In 2001, the Company acquired certain assets of Geodz, Inc., a software engineering firm, to
enhance its pipeline position survey software, and in 2002 it acquired the assets of Marr Associates Pipeline Integrity, Ltd, a Canadian provider of data management and direct pipeline assessment services. Additionally, in 2002 the Company acquired
approximately 24 percent of NDT Systems & Services, AG, a German firm developing a new ultrasonic pipeline inspection tool. As part of the investment the Company obtained certain exclusive rights to market the ultrasonic pipeline inspection
service.



Customers and
Competition.    The Tubular Services groups customers include major and independent oil and gas companies, national oil companies, drilling and workover contractors, oilfield equipment and product distributors and
manufacturers, oilfield service companies, pipeline operators, steel mills, and other industrial companies. The Companys competitors in Tubular Services include, among others, Ameron International Corp, EDO Corporation, Pipeline Integrity
International Ltd. (a division of General Electric), ShawCor Ltd., Smith International, Inc., Franks International, Inc., H. Rosen Engineerng, GmbH; T.D. Williamson, Inc.; and Patterson Tubular Services. In addition, the Tubular Services group
competes with a number of smaller regional competitors in tubular inspection. Certain foreign jurisdictions and government-owned petroleum companies located in some of the countries in which this group operates have adopted policies or regulations
which may give local nationals in these countries certain competitive advantages. Within the Companys corrosion control products, certain substitutes such as non-metallic tubulars, inhibitors, corrosion resistant alloys, cathodic protection
systems, and non-metallic liner systems also compete with the Companys products. Management believes that the principal competitive factors affecting its Tubular Services business are performance, quality, reputation, customer service, product
availability, availability of spare parts and consumables, breadth of product line and price.



Drilling Services Group



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



Solids Control.    The Drilling Services group
uses a variety of technologies to separate drill cuttings from drilling fluids, and to transport, dry and refine drill cuttings for safe disposal. The Company believes the



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



The Company has a history of introducing new
solids control products and services obtained both through its internal development and through acquiring or licensing technologies from others. A shale shaker is the primary device on a drilling rig for removing drill solids from drilling mud. The
Companys VSM 300, introduced in 1996, was
the first shale shaker which offered a balanced elliptical vibratory motion, which improves cuttings conveyance and reduces oil on cuttings. The Company also introduced its new Cobra® shale shaker in 1998. The Cobra® has a small footprint and a lightweight design, and is priced to compete in the more
price-sensitive segment of the market. The Company began offering the King Cobra shale shaker in 1999. The King Cobra is approximately one-third larger than the Cobra® Shaker, and also targets both the offshore and land markets.



The Company acquired the Gumbo Chain from Nu-Tec, Inc. in 1997, a product to remove sticky shale or gumbo, which is encountered in certain geologic environments, from drilling fluid. In 1998, the Company
initiated operations with a proprietary unit which removes hydrocarbons from drill cuttings using heat, a process called Thermal Desorption. The processed cuttings are usually rendered inert and can be disposed of with minimal
environmental impact. The Company has commenced operation of additional thermal desorption units in South America and Africa, and acquired the thermal desorption operations of Maersk Contractors Environmental Division in Scotland and Kazakhstan in
2003.



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



The Drilling Services group manufactures conventional and linear motion shale shakers and shale shaker screens, high speed and conventional centrifuges, desanders (which remove large drill solids from drilling mud), desilters (which remove
small drill solids from drilling mud), degassers (which remove air and gasses from drilling mud) and closed loop drilling fluids systems at its facilities in Conroe, Texas; Houston, Texas; Aberdeen, Scotland; Leduc, Alberta; and Trinidad. The group
markets solids control equipment under the Brandt® brand name. For the year ended December 31, 2003, approximately 37% of the Drilling
Services groups solids control revenue was generated from the sale of solids control equipment and inventory, and approximately 63% of such revenue was generated from rentals and services.



Drilling Rig Instrumentation.    The Drilling
Services groups rig instrumentation systems provide drilling rig operators real time measurement and monitoring of critical parameters required to improve rig safety and efficiency. Systems are both sold and rented, and are typically comprised
of several sensors placed throughout



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the rig to measure parameters such as weight on bit, hookload, standpipe pressure, mud pump strokes, drilling mud levels, torque, and others, all networked
back to a central command station for review, recording and interpretation. Additionally, the rig instrumentation packages typically provide multiple CRT screens around the rig for various rig personnel to perform individual jobs more effectively,
and cameras for certain areas to permit remote monitoring. The Company offers proprietary touch-screen displays, interpretive software, and data archival and retrieval capabilities. In 1999, the Company introduced its RigSense product, which combines leading hardware and software
technologies into an integrated drilling rig package. This product permits access of drilling data from offsite locations, enabling company personnel to monitor drilling operations from an office environment, through a secure link. In 2001, the
Company completed the acquisitions of Chimo Equipment Ltd. in Canada; Alberta Instruments Ltd. in Canada; Adair Supply & Rentals, Inc. in Corpus Christi, TX; and Wagner Instrumentation Inc. in Houston, TX; which were all engaged in drilling rig
instrumentation business. In 2003, the Company made an equity investment in a small start-up company engaged in the development of software to enhance RigSense with rig back office information such as payroll and purchasing.



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



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



Coiled Tubing & Wireline Products Group



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



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



Coiled tubing provides a number of significant functional
advantages over the principal alternatives of conventional drill pipe and workover pipe. Coiled tubing allows faster tripping, since the coiled tubing can be reeled very quickly on and off a drum and in and out of a wellbore. In
addition, the small size of the coiled tubing



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unit compared to an average workover rig or drilling rig reduces preparation time at the well site. Coiled tubing permits a variety of workover and other
operations to be performed without having to pull the existing production tubing from the well and allows ease of operation in horizontal or highly deviated wells. Thus, operations using coiled tubing can be performed much more quickly and, in many
instances, at a significantly lower cost. Finally, use of coiled tubing generally allows continuous production of the well, eliminating the need to temporarily stop the flow of hydrocarbons. As a result, the economics of a workover are improved
because the well can continue to produce hydrocarbons and thus produce revenues while the well treatments are occurring. Continuous production also reduces the risk of formation damage which can occur when the flow of fluids is stopped or isolated.



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



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



Generally, the
Coiled Tubing & Wireline Products group supplies customers with the equipment and components necessary to use coiled tubing, which the customers typically purchase separately. The groups coiled tubing product line consists of coiled tubing
units, coiled tubing pressure control equipment, pressure pumping equipment, snubbing units (which are units that force tubulars into a well when pressure is contained within the wellbore), nitrogen pumping equipment and cementing, stimulation and
blending equipment. The group markets its coiled tubing equipment under the Hydra Rig® brand name primarily to providers of coiled tubing drilling and workover
services. The Companys primary coiled tubing unit production facilities are located at its Hydra Rig facility in Fort Worth, Texas. In addition, the group markets coiled tubing pressure control equipment under the Texas Oil Tools® brand name and manufactures this equipment at its facility in Conroe, Texas.



The Companys quality tubing business manufactures coiled tubing at its mill in Houston, Texas. In 2003, Quality Tubing
introduced a new corrosion-resistant alloy coiled tubing used primarily for velocity string recompletions (hang-off applications) of lower pressure gas wells (QT-16Cr). In addition to hang-off coiled tubing strings, Quality Tubing
designs, manufactures, and sells conventional coiled tubing work strings used in well remediation and drilling operations.



The Company began offering its TEM cementing
equipment and fabricating nitrogen pumping units in Tulsa, Oklahoma, in December 1997, when it acquired Tulsa Equipment Manufacturing Company. Additionally, the Company acquired Weston Oilfield Engineering Limited in Norwich, United Kingdom, in
December 1998, which strengthened its coiled tubing unit refurbishing, servicing and spare parts business, as well as added new cryogenic nitrogen technologies. The Companys 2001 acquisition of Bradon Industries added a significant
manufacturing plant in Canada, where it sells equipment now under the brand name Hydra Rig Canada. The Company acquired Quality Tubing, Inc. in 2001. It also added additional nitrogen-pumping products and technologies through its 2001 acquisition of
Albins Enterprises in Duncan, Oklahoma. In early 2004, the Company completed the acquisition of a coiled tubing equipment manufacturer in Texas.



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



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



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



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



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



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2003 Acquisitions



In 2003, the Company made the following acquisitions and related transactions:



|                                          |  |                              |  |                          |  |                     
|----------------------------------------- |  | ---------------------------- |  | ------------------------ |  | --------------------
|Acquisition                               |  | Form                         |  | Operating Segment        |  | Date of Transactions
|Smart Screen Systems, Inc.                |  | Minority Interest Investment |  | Drilling Services        |  | January 2003        
|Petroleum Tubular Inspection, Inc.        |  | Asset Purchase               |  | Tubular Services         |  | January 2003        
|Church Oil Tools                          |  | Stock Purchase               |  | Drilling Equipment       |  | January 2003        
|Chromex                                   |  | Asset Purchase               |  | Tubular Services         |  | March 2003          
|MDS Technology                            |  | Asset Purchase               |  | Drilling Equipment       |  | March 2003          
|Patco Rod Service, Inc.                   |  | Asset Purchase               |  | Tubular Services         |  | June 2003           
|Drill Logic, LLC                          |  | Minority Interest Investment |  | Drilling Services        |  | July 2003           
|Early Oil Tools                           |  | Asset Purchase               |  | Coiled Tubing & Wireline |  | September 2003      
|R D Drilling                              |  | Technology Purchase          |  | Drilling Equipment       |  | September 2003      
|Tecnicos Tubulares                        |  | Asset Purchase               |  | Tubular Services         |  | October 2003        
|Maersk Contractors Environmental Division |  | Asset Purchase               |  | Drilling Services        |  | October 2003        
|Rocky Mountain Fluid Technologies, Inc    |  | Asset Purchase               |  | Drilling Services        |  | October 2003        
|Mud Rentals Ltd.                          |  | Stock Purchase               |  | Drilling Services        |  | November 2003       



The Company paid $36.6
million in cash for acquisitions and related transactions in 2003, and paid $2.4 million in cash in 2003 related to transactions closed before 2003.



Seasonal Nature of the Companys Business



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



The Companys Tubular Services (specifically, tubular inspection and tubular coating) and Drilling Services (both solids control and rig
instrumentation) businesses in Canada typically realized high first quarter activity levels, as operators took advantage of the winter freeze to help gain access to remote drilling and production areas. These businesses then typically declined
during the second quarter due to warming weather conditions which resulted in thawing, softer ground, difficulty accessing drill sites, and road bans that curtailed drilling activity (Canadian Breakup). In 2003, the business declined
approximately $7.0 million in revenue and $6.0 million in operating profit from the first quarter to the second quarter. Typically in past years, the business rebounds in the third and fourth quarter. In past years, Tubular Services activity in
both the United States and Canada increased during the third quarter and then peaked in the fourth quarter as operators spent the remaining drilling and/or production capital budgets for the year.



The pipeline inspection portion of Tubular Services has typically experienced
reduced activity during the first quarter of the calendar year. The high winter demand for gas and petroleum products in the northern states and the consequent curtailment of pipeline maintenance and inspection programs has resulted in less
opportunity to perform pipeline inspection during this time. The Companys Fiberglass Pipe business in China has typically declined in the first quarter due to the impact of weather on manufacturing and installation operations, and due to
business slow downs associated with the Chinese New Year.



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



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



Marketing & Distribution Network



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



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



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



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



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



The Companys foreign operations, which include significant operations in Canada, Europe, the Far East, the Middle East and Latin America, are
subject to the risks normally associated with conducting business in foreign countries, including foreign currency exchange risks and uncertain political and economic environments, which may limit or disrupt markets, restrict the movement of funds
or result in the deprivation of contract rights or the taking of property without fair compensation. Government-owned petroleum companies located in some of the countries in which the Company operates have adopted policies (or are subject to
governmental policies) giving preference to the purchase of goods and services from companies that are majority-owned by local nationals. As a result of such policies, the Company relies on joint ventures, license arrangements and other business
combinations with local nationals in these countries. In addition, political considerations may disrupt the commercial relationship between the Company and such government-owned petroleum companies. Although the Company has not experienced any
significant problems in foreign countries arising from nationalistic policies,



17



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political instability, economic instability or currency restrictions, there can be no assurance that such a problem will not arise in the future. See Note 12
of the Notes to the Consolidated Financial Statements for information regarding geographic revenue information.



Research and New Product Development and Intellectual Property



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



As of December 31, 2003, the Company held a substantial number of United States patents and had patent applications pending. Expiration dates of such patents range from 2004 to 2020. As of such date, the Company also had foreign patents and
patent applications pending relating to inventions covered by the United States patents. Additionally, the Company maintains a substantial number of trade and service marks and maintains a number of trade secrets.



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



Engineering and Manufacturing



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



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



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



18



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



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



Raw Materials



The Company believes that materials and components used in its servicing and manufacturing operations and purchased for sales are readily available at
competitive prices from numerous sources. The prices paid by the Company for its raw materials may be affected by, among other things, energy, steel and other commodity prices; tariffs and duties on imported materials; and foreign currency exchange
rates. The Company believes that it may experience higher steel prices in 2004 than it has experienced in 2003, based on recent increases in spot prices for steel.



Backlog



Sales of the Companys products are made on the basis of written purchase orders or contracts and, consistent with industry practice, by e-mail, fax,
letter or oral commitment later confirmed by a written order. In accordance with industry practice, orders and commitments generally can be cancelled by customers at any time. In addition, orders and commitments are sometimes modified before or
during manufacture of the products. The Companys backlog is based upon anticipated revenues from customer orders that the Company believes are firm. The level of backlog at any particular time is not necessarily indicative of the future
operating performance of the Company. Almost all of the Companys backlog is for capital equipment orders. Although aftermarket spares, services and consumables for Drilling Equipment and Coiled Tubing and Wireline products are included in the
Companys order intake and backlog, these are typically turned quickly, and comprise a small portion of the backlog.



Backlog at December 31, 2003, 2002, and 2001 was as follows (in thousands):



|                                  |  |              |         |      |   |         |  |   |        
|--------------------------------- |  | ------------ | ------- | ---- | - | ------- |  | - | -------
|                                  |  | December 31,
|                                  |  | 2003         |         | 2002 |   | 2001   
|Drilling Equipment Group          |  | $            | 126,549 |      | $ | 218,098 |  | $ | 251,531
|Coiled Tubing & Wireline Products |  |              | 37,046  |      |   | 49,115  |  |   | 55,864 
|                                  |  |              |         |      |   |         |  |   |        
|Total                             |  | $            | 163,595 |      | $ | 267,213 |  | $ | 307,395
|                                  |  |              |         |      |   |         |  |   |        



See the discussion of
the recent decline in backlog in the Executive Summarysection of Managements Discussion and Analysis of Results of Operations and Financial Condition. Backlog at December 31, 2003 includes $43.2 million related to the Companys
MIL rig fabrication business. As discussed earlier, the Company expects to exit the rig fabrication business in 2004. The Company expects that most of the backlog as of December 31, 2003 will be shipped by December 31, 2004.



Environmental Matters



The Companys manufacturing processes and its inspection, coating and solids control services routinely involve the
handling and disposal of chemical substances and waste materials, some of which may be considered to be hazardous wastes. These potential hazardous wastes result primarily from the manufacturing and testing



19



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processes and the use of mineral spirits to clean pipe threads during the tubular inspection process and from the coating process, and the handling of and,
in normal cases, the disposal of drilling fluids and cuttings on behalf of the drillers and/or producers.



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



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



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



Certain third-party owned disposal facilities used by the Company or its subsidiaries have been investigated under state and federal Superfund statutes,
and the Company is currently named as a potentially responsible party for cleanup at three such sites. Although the Companys level of involvement varies at each site, in general, the Company is one of numerous parties named and will be
obligated to pay an allocated share of the cleanup costs. While it is not feasible to predict the outcome of these matters with certainty, management believes that their ultimate resolution should not result in material costs to the Company or
otherwise materially and adversely affect the Companys operations or financial position.



Employees



At December
31, 2003, the Company had a total of 10,281 employees (of which 1,382 were temporary employees). The Company considers its relations with its employees to be good.



20



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GLOSSARY OF OILFIELD TERMS



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



21



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



22



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



23



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



24



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



25



---

ITEM 2.    PROPERTIES



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



|                          |  |                                                                                                                       |  |                           |  |                     |  |                |  |                       
|------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------------------- |  | -------------- |  | ----------------------
|Location                  |  | Description                                                                                                           |  | Building Size(SquareFeet) |  | PropertySize(Acres) |  | Owned/Leased   |  | Lease Termination Date
|                          |  |                                                                                                                       |  |                          
|DRILLING EQUIPMENT GROUP: |  |                                                                                                                       |  |                           |  |                     |  |               
|                          |  |                                                                                                                       |  |                           | 
|Houston, Texas            |  | West Little York: Shaffer, MDT, BJ, & Systems Manufacturing Facility, Repair, Service, Administrative & Sales Offices |  | 619,000                   |  | 34.00               |  | Owned          |  |                       
|                          |  |                                                                                                                       |  |                           | 
|Orange, California        |  | Manufacturing & Office Facility759 N. Eckhoff                                                                        |  | 126,000                   |  | 8.90                |  | BuildingOwned* |  | 04/30/13              
|                          |  |                                                                                                                       |  |                           | 
|Aberdeen, Scotland        |  | Tubular & Pressure Control Manufacturing, Administrative & Sales                                                      |  | 107,974                   |  | 7.50                |  | Leased         |  | 08/31/19              
|                          |  |                                                                                                                       |  |                           | 
|Etten-Leur, Netherlands   |  | BJ Mfg. Plant/Sales                                                                                                   |  | 75,000                    |  | 6.00                |  | Owned          |  |                       
|                          |  |                                                                                                                       |  |                           | 
|Houston, Texas            |  | Brittmore Shaffer Repair & Service Facility                                                                           |  | 66,500                    |  | 5.79                |  | Leased         |  | 11/01/11              
|                          |  |                                                                                                                       |  |                           | 
|Aberdeen, Scotland        |  | Systems & Shaffer Sales, Service & Distribution Facility                                                              |  | 63,000                    |  | 6.00                |  | Owned          |  |                       
|                          |  |                                                                                                                       |  |                           | 
|Mexicali, Mexico          |  | BJ Mfg. Plant                                                                                                         |  | 58,813                    |  |                     |  | Leased         |  | 02/01/10              
|                          |  |                                                                                                                       |  |                           | 
|Great Yarmouth, England   |  | Derrick Manufacturing Facilities, Administrative & Sales Offices                                                      |  | 53,983                    |  | 3.76                |  | Leased         |  | 07/01/13              
|                          |  |                                                                                                                       |  |                           | 
|Singapore                 |  | Systems Offices, Service & Distribution Facility                                                                      |  | 43,529                    |  | 1.20                |  | BuildingOwned* |  | 07/01/40              
|                          |  |                                                                                                                       |  |                           | 
|Stavanger, Norway         |  | Drilling Equipment Work Shop, Warehouse & Customer Service Center                                                     |  | 41,333                    |  | 0.42                |  | Leased         |  | 06/01/06              
|                          |  |                                                                                                                       |  |                           | 
|Orange, California        |  | Administrative Offices743 N. Eckhoff                                                                                 |  | 35,000                    |  | 1.60                |  | Leased         |  | 12/31/05              
|                          |  |                                                                                                                       |  |                          
|TUBULAR SERVICES:         |  |                                                                                                                       |  |                           |  |                     |  |               
|                          |  |                                                                                                                       |  |                           | 
|Al Khobar, Saudi Arabia   |  | Reclamation, Inspection Facility & Offices                                                                            |  | 340,203                   |  | 8.00                |  | Leased         |  | 12/31/04              
|                          |  |                                                                                                                       |  |                           | 
|Houston, Texas            |  | Sheldon Road: Inspection Facility                                                                                     |  | 335,993                   |  | 192.00              |  | Owned          |  |                       
|                          |  |                                                                                                                       |  |                           | 
|Houston, Texas            |  | Holmes Road Complex: Manufacturing, Warehouse, Corporate Offices, Coating Manufacturing Plant & Pipeline Services     |  | 300,000                   |  | 50.00               |  | Owned          |  |                       
|                          |  |                                                                                                                       |  |                           | 
|Little Rock, Arkansas     |  | Fiberglass Tubular Manufacturing Plant, R&D Lab, Administrative Offices                                               |  | 262,784                   |  | 44.00               |  | Leased         |  | Yr. to Yr.            
|                          |  |                                                                                                                       |  |                           | 
|Neiva, Columbia           |  | Inspection Yard & Warehouse                                                                                           |  | 215,280                   |  |                     |  | Leased         |  | 03/31/04              
|                          |  |                                                                                                                       |  |                           | 
|Yopal, Colombia           |  | Inspection Warehouse & Storage                                                                                        |  | 215,280                   |  |                     |  | Owned          |  |                       



26



---

|                       |  |                                                                           |  |                           |  |                     |  |                |  |                       
|---------------------- |  | ------------------------------------------------------------------------- |  | ------------------------- |  | ------------------- |  | -------------- |  | ----------------------
|Location               |  | Description                                                               |  | Building Size(SquareFeet) |  | PropertySize(Acres) |  | Owned/Leased   |  | Lease Termination Date
|                       |  |                                                                           |  |                           | 
|Sand Springs, Oklahoma |  | Fiberglass Tubular Manufacturing Plant                                    |  | 189,173                   |  | 6.50                |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Amelia, Louisiana      |  | Coating Plant & Inspection Facility                                       |  | 179,574                   |  | 84.00               |  | Leased         |  | 12/31/16              
|                       |  |                                                                           |  |                           | 
|Houston, Texas         |  | Coating Plant & Inspection Facility                                       |  | 168,683                   |  | 49.00               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Wichita, Kansas        |  | Fiberglass Tubular Manufacturing Plant                                    |  | 129,746                   |  | 15.00               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Edmonton, Alberta      |  | Sucker Rod Inspection & Oilwell Engine Reclamation                        |  | 121,545                   |  | 10.00               |  | Leased         |  | 12/31/05              
|                       |  |                                                                           |  |                           | 
|Nisku, Alberta         |  | Coating Plant, Inspection Facility                                        |  | 114,000                   |  | 30.00               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Amelia, Louisiana      |  | Coating Plant, Inspection & Storage Facilities                            |  | 102,000                   |  | 90.00               |  | BuildingOwned* |  | 05/30/06              
|                       |  |                                                                           |  |                           | 
|Casper, Wyoming        |  | Inspection Facility                                                       |  | 91,720                    |  | 29.00               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Midland, Texas         |  | Coating Plant                                                             |  | 87,000                    |  | 25.00               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Houston, Texas         |  | Highway 90: Coating Plant                                                 |  | 83,000                    |  | 43.00               |  | Leased         |  | 07/31/11              
|                       |  |                                                                           |  |                           | 
|San Antonio, Texas     |  | Fiberglass Tubular Manufacturing Plant, R & D Lab,
Administrative Offices |  | 82,700                    |  | 19.57               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Big Spring, Texas      |  | Fiberglass Tubular Manufacturing Plant & AdministrativeOffices            |  | 78,600                    |  | 12.00               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Houston, Texas         |  | Engineering/Technical Research Center                                     |  | 76,000                    |  | 6.00                |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Navasota, Texas        |  | Coating Plant, Inspection Pipe Storage                                    |  | 65,000                    |  |                     |  | BuildingOwned* |  | 06/30/13              
|                       |  |                                                                           |  |                           | 
|Lone Star, Texas       |  | Inspection Facility                                                       |  | 56,700                    |  | 80.00               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Aberdeen, Scotland     |  | Inspection Facility, Coating Plant, Manufacturing, Administrative & Sales |  | 53,425                    |  | 10.00               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Coevorden, Netherlands |  | Inspection Reclamation & Repair Facility                                  |  | 53,361                    |  | 2.00                |  | Leased         |  | 12/04/04              
|                       |  |                                                                           |  |                           | 
|Harvey, Louisiana      |  | Coating Plant & Inspection Facility                                       |  | 53,000                    |  | 7.00                |  | Owned &Leased  |  | 09/30/04              
|                       |  |                                                                           |  |                           | 
|Tuas, Singapore        |  | Coating Plant & Inspection Facility                                       |  | 50,644                    |  | 8.00                |  | BuildingOwned* |  | 06/09/09              
|                       |  |                                                                           |  |                           | 
|Odessa, Texas          |  | Coating Plant & Inspection Facility                                       |  | 45,332                    |  | 10.00               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Little Rock, Arkansas  |  | Fiberglass Tubular Manufacturing Plant                                    |  | 45,000                    |  |                     |  | Leased         |  | 10/01/09              
|                       |  |                                                                           |  |                           | 
|Berlaimont, France     |  | Coating Plant                                                             |  | 44,000                    |  | 16.00               |  | Owned          |  |                       
|                       |  |                                                                           |  |                           | 
|Celle, Germany         |  | Inspection Facility, Administrative & Engineering Offices                 |  | 43,560                    |  | 12.00               |  | BuildingOwned* |  | 2049                  



27



---

|                                   |  |                                                                                                                        |  |                           |  |                     |  |                |  |                       
|---------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------------------- |  | -------------- |  | ----------------------
|Location                           |  | Description                                                                                                            |  | Building Size(SquareFeet) |  | PropertySize(Acres) |  | Owned/Leased   |  | Lease Termination Date
|                                   |  |                                                                                                                        |  |                           | 
|Morgan City, Louisiana             |  | Inspection Facility                                                                                                    |  | 42,400                    |  | 3.00                |  | BuildingOwned* |  | Mo. to Mo.            
|                                   |  |                                                                                                                        |  |                           | 
|Casper, Wyoming                    |  | Inspection Facility                                                                                                    |  | 41,030                    |  | 40.00               |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Edmond, Oklahoma                   |  | Coating Plant                                                                                                          |  | 40,000                    |  | 19.00               |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Farmington, New Mexico             |  | Inspection Storage Facilities                                                                                          |  | 37,725                    |  | 50.00               |  | Leased         |  | 03/31/14              
|                                   |  |                                                                                                                        |  |                           | 
|Harbin, Peoples Republic of China |  | Fiberglass Tubular Manufacturing Plant                                                                                 |  | 35,000                    |  |                     |  | Leased         |  | 12/31/05              
|                                   |  |                                                                                                                        |  |                           | 
|Odessa, Texas                      |  | Inspection Facility                                                                                                    |  | 33,910                    |  | 50.00               |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Nisku, Alberta                     |  | Trucking, Coating, Inspection & Storage Facility                                                                       |  | 32,550                    |  | 155.00              |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                          
|DRILLING SERVICES:                 |  |                                                                                                                        |  |                           |  |                     |  |               
|                                   |  |                                                                                                                        |  |                           | 
|Cedar Park, Texas                  |  | Instrumentation Manufacturing Facility, Administrative & Sales Offices                                                 |  | 260,000                   |  | 40.00               |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Conroe, Texas                      |  | Solids Control & Pressure Control Manufacturing Facility, Warehouse, Administrative & Sales Offices & Engineering Labs |  | 160,000                   |  | 30.49               |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Aberdeen, Scotland                 |  | Solids Control Manufacturing Facility Assembly, Administrative & Sales                                                 |  | 77,400                    |  | 6.25                |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Bogota, Colombia                   |  | Solids Control & Inspection Yard & Warehouse                                                                           |  | 69,966                    |  |                     |  | Leased         |  | 08/01/04              
|                                   |  |                                                                                                                        |  |                           | 
|Leduc, Alberta                     |  | MDT, Shaffer, Chimo, Alberta Instruments, Varco Services & Warehouse Facility                                          |  | 64,056                    |  | 4.60                |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Leduc, Alberta                     |  | Solids Control Equipment Rental & Services Facility                                                                    |  | 41,340                    |  | 9.36                |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Montrose, Scotland                 |  | Forties Road Systems Service Center & Office Facility                                                                  |  | 34,000                    |  | 3.00                |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                          
|COILED TUBING / WIRELINE:          |  |                                                                                                                        |  |                           |  |                     |  |               
|                                   |  |                                                                                                                        |  |                           | 
|Houston, Texas                     |  | QT Coiled Tubing Manufacturing Facility, Warehouse and Offices                                                         |  | 90,000                    |  | 14.00               |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Fort Worth, Texas                  |  | Coiled Tubing Manufacturing Facility, Warehouse, Administrative & Sales Offices                                        |  | 72,500                    |  | 6.96                |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Duncan, Oklahoma                   |  | Nitrogen Units Manufacturing Facility, Warehouse & Offices                                                             |  | 67,600                    |  | 13.28               |  | Owned          |  |                       
|                                   |  |                                                                                                                        |  |                           | 
|Calgary, Alberta                   |  | Coiled Tubing Manufacturing Facility, Administrative & Sales Offices                                                   |  | 48,040                    |  | 2.52                |  | Owned          |  |                       



28



---

|                        |  |                                                                              |  |                           |  |                     |  |                |  |                       
|----------------------- |  | ---------------------------------------------------------------------------- |  | ------------------------- |  | ------------------- |  | -------------- |  | ----------------------
|Location                |  | Description                                                                  |  | Building Size(SquareFeet) |  | PropertySize(Acres) |  | Owned/Leased   |  | Lease Termination Date
|                        |  |                                                                              |  |                           | 
|Tulsa, Oklahoma         |  | Pumping Manufacturing Facility, Warehouse & Offices                          |  | 40,700                    |  | 4.47                |  | Leased         |  | 12/31/07              
|                        |  |                                                                              |  |                           | 
|Tuas, Singapore         |  | Coiled Tubing & Wireline Products Manufacturing & Administrative Facility    |  | 35,300                    |  | 1.50                |  | BuildingOwned* |  | 04/15/14              
|                        |  |                                                                              |  |                           | 
|Great Yarmouth, England |  | Coiled Tubing & Nitrogen Units Manufacturing, Administrative & Sales Offices |  | 29,000                    |  | 1.70                |  | Leased         |  | 08/22/11              
|                        |  |                                                                              |  |                           | 
|CORPORATE:              |  |                                                                              |  |                           |  |                     |  |                |  |                       
|                        |  |                                                                              |  |                           | 
|Houston, Texas          |  | Corporate Administrative Office                                              |  | 14,500                    |  | OfficeTower         |  | Leased         |  | 08/31/11              

---

|* |  | Building owned but real estate leased.
|- |  | --------------------------------------



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



ITEM 3.    LEGAL PROCEEDINGS



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



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



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



29



---

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



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



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



No matters were submitted to a vote of stockholders during the fourth quarter of 2003.



30



---

PART II



ITEM 5.     MARKETS FOR REGISTRANTS COMMON EQUITY STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.



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



|            |  |      |       |      |   |       |  |     |       |  |   |      
|----------- |  | ---- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|            |  | 2003 |       | 2002
|            |  | High |       | Low  |   | High  |  | Low
|1st Quarter |  | $    | 19.42 |      | $ | 16.18 |  | $   | 20.10 |  | $ | 13.25
|2nd Quarter |  |      | 22.26 |      |   | 17.45 |  |     | 21.73 |  |   | 17.54
|3rd Quarter |  |      | 20.16 |      |   | 16.33 |  |     | 18.60 |  |   | 13.55
|4th Quarter |  |      | 21.10 |      |   | 16.25 |  |     | 18.91 |  |   | 14.94



The closing price of
the Companys common stock on February 20, 2004 was $19.86. The approximate number of stockholders of record on February 20, 2004 was 1,130.



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



31



---

ITEM 6.    SELECTED FINANCIAL DATA



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



|                                                          |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|--------------------------------------------------------- |  | ------------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                          |  | Years Ended December 31,                                |          
|                                                          |  | 2003                                                    |           |   | 2002 |   |           | 2001 |  |   | 2000      |   |  | 1999 |          
|                                                          |  | (Dollars in thousands, except ratio and per share data) |          
|Statement of Income Data:                                 |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Revenue                                                   |  | $                                                       | 1,449,607 |   |      | $ | 1,335,064 |      |  | $ | 1,267,809 |   |  | $    | 866,615   |   |  | $ | 975,848   |  
|Operating profit(1)                                       |  |                                                         | 139,981   |   |      |   | 156,065   |      |  |   | 158,126   |   |  |      | 60,911    |   |  |   | 67,348    |  
|Net income(2)                                             |  | $                                                       | 67,243    |   |      | $ | 79,807    |      |  | $ | 82,968    |   |  | $    | 21,055    |   |  | $ | 29,809    |  
|                                                          |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic earnings per common share(2)                        |  | $                                                       | 0.69      |   |      | $ | 0.83      |      |  | $ | 0.87      |   |  | $    | 0.23      |   |  | $ | 0.33      |  
|                                                          |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Dilutive earnings per common share(2)                     |  | $                                                       | 0.68      |   |      | $ | 0.82      |      |  | $ | 0.86      |   |  | $    | 0.22      |   |  | $ | 0.32      |  
|                                                          |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Balance Sheet Data (end of period):                       |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Working capital                                           |  | $                                                       | 559,046   |   |      | $ | 529,647   |      |  | $ | 423,602   |   |  | $    | 263,378   |   |  | $ | 310,175   |  
|Total assets                                              |  |                                                         | 1,764,339 |   |      |   | 1,661,060 |      |  |   | 1,429,110 |   |  |      | 1,076,982 |   |  |   | 1,131,313 |  
|Total debt                                                |  |                                                         | 456,918   |   |      |   | 467,928   |      |  |   | 322,614   |   |  |      | 136,507   |   |  |   | 233,335   |  
|Common stockholders equity                               |  |                                                         | 994,242   |   |      |   | 920,282   |      |  |   | 828,314   |   |  |      | 731,983   |   |  |   | 694,245   |  
|                                                          |  |                                                         |           |   |     
|Other Data:                                               |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net cash provided by operating activities                 |  | $                                                       | 100,763   |   |      | $ | 101,783   |      |  | $ | 83,995    |   |  | $    | 81,787    |   |  | $ | 119,064   |  
|Cash flows used for investing activities                  |  | $                                                       | (106,591  | ) |      | $ | (202,333  | )    |  | $ | (211,126  | ) |  | $    | (64,872   | ) |  | $ | (43,638   | )
|Cash flows provided by (used for) financing activities    |  | $                                                       | (15,156   | ) |      | $ | 148,377   |      |  | $ | 173,118   |   |  | $    | (86,718   | ) |  | $ | (29,891   | )
|Earnings per common share before goodwill amortization(2) |  | $                                                       | 0.68      |   |      | $ | 0.82      |      |  | $ | 0.97      |   |  | $    | 0.31      |   |  | $ | 0.41      |  
|Ratio of earnings to fixed charges(3)                     |  |                                                         | 3.8x      |   |      |   | 4.7x      |      |  |   | 5.6x      |   |  |      | 3.1x      |   |  |   | 3.0x      |  
|Depreciation and amortization                             |  | $                                                       | 67,199    |   |      | $ | 59,246    |      |  | $ | 67,900    |   |  | $    | 56,518    |   |  | $ | 57,180    |  
|Capital expenditures                                      |  | $                                                       | 67,092    |   |      | $ | 49,377    |      |  | $ | 65,834    |   |  | $    | 45,463    |   |  | $ | 30,729    |  

---

|(1) |  | The 1999 operating profit includes $7.8 million of transaction costs and write-offs associated with the terminated Newpark merger. Excluding these costs, operating profit was $75.2
million. The 2000 operating profit includes $9.7 million of financial advisor fees, $4.3 million of compensation costs, $5.1 million to fully vest employees participating in the Executive Stock Match program, $3.5 million in equipment
rationalization charges and $3.9 million of other transaction costs associated with the May 2000 merger between Varco and Tuboscope. Excluding these costs, operating profit was $87.5 million. The 2001 operating profit includes $16.5 million of
litigation costs. Excluding these costs, operating profit was $174.6 million. The 2002 operating profit includes $3.7 million associated with the acquisition of substantially all of the oilfield services business of ICO and $2.8 million of severance
costs resulting from early termination of employment agreements for several senior executives arising out of the May 2000 merger between Varco and Tuboscope. Excluding these costs, operating profit was $162.6 million. The 2003 operating profit
includes an asset impairment charge of $11.2 million related to the Companys rig fabrication business. Excluding these costs, operating profit was $151.2 million for 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), effective January 1, 2002. The effects of not
amortizing goodwill and other intangible assets in periods prior to the adoption of SFAS 142 would have resulted in net income of $93.4 million, $29.5 million, and $38.2 million for the years ended December 31, 2001, 2000, and 1999, respectively;
basic earnings per common share of $.98, $.32, and $0.42 for the years ended December 31, 2001, 2000, and 1999, respectively; and diluted earnings per common share of $.97, $0.31, and $0.41 for the years ended December 31, 2001, 2000, and 1999,
respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32



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|(3) |  | For the purpose of this calculation, earnings consist of net income (loss) before income taxes, extraordinary items, and fixed charges. Fixed charges consist
of interest expense and amortization of debt discount and related expenses believed by management to be representative of the interest factor thereon.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



General



Executive Summary



The Companys oilfield service businesses generally performed well in 2003, but the strength of these businesses was overshadowed by weak results in
the Companys capital equipment businesses. In particular, results of the Drilling Equipment Group suffered from softening demand and cost overruns on a large rig fabrication project.



During 2003, the Companys service-oriented businesses benefited from
rising levels of oilfield activity in several important markets, including North American land drilling, Mexico, the Middle East and the Far East. These benefits were somewhat offset by slightly declining oilfield activity in other key markets,
including the U.S. Gulf of Mexico, the North Sea and Venezuela. Demand for the Companys coiled tubing and fiberglass tubing for oilfield applications strengthened in 2003.



The Company generally experienced declining market conditions during 2003 in its businesses that sell capital equipment to
other oilfield service companies, including drilling equipment, solids control equipment, and rig instrumentation equipment. Sales of coiled tubing and wireline equipment were modestly improved, but backlog for the Coiled Tubing and Wireline
Products Group turned down at year end. Backlog and revenue for Drilling Equipment generally trended down throughout 2003.



Looking forward, the Company believes worldwide drilling activity should remain strong in 2004, led by North America, Latin America and the Middle East,
and that its oilfield service businesses should generally continue to perform well. However, offshore drilling activity, particularly in the Gulf of Mexico and the North Sea, continues to be very slow and has not yet shown signs of improvement.
Additionally, the Company expects that the market for premium tubulars, which is dependent in part on the level of drilling critical wells (i.e., high-pressure, high-temperature, deep and/or offshore wells), will remain slow in 2004.
Premium tubulars for critical wells are more likely to be coated or inspected by the Company than conventional tubulars for shallower, onshore drilling because the cost of tubular failures is much higher for critical wells. Also, the Company expects
that the market for new drillpipe will remain slow in 2004, due primarily to an overhang of drillpipe in the market currently. This affects the Companys tubular coating business because most new drillpipe is coated before it is placed into
service.



The Company does not expect the market for capital
equipment to strengthen significantly in 2004, and foresees few new drilling rigs being fabricated in 2004. In view of the declining revenue and backlog for the Drilling Equipment Group, the Company has begun a significant restructuring of the
Group, as detailed below, to lower its overhead. Additionally, the Company has decided to exit the rig fabrication business, which it entered by acquiring Morinoak International Ltd. (MIL) in September 2001. The Company expects that the
focus of the Drilling Equipment Group in 2004 will be on downsizing operations; moving manufacturing to more cost efficient locations; launching new products targeting the land drilling contractor market; providing units to upgrade existing drilling
rigs; and continuing the Groups emphasis on aftermarket spares and services business.



33



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Operating Environment Overview



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



|                                                  |  |       |       |       |   |       |  |             |       |  |             |   |  |       |   
|------------------------------------------------- |  | ----- | ----- | ----- | - | ----- |  | ----------- | ----- |  | ----------- | - |  | ----- | --
|                                                  |  | 2003* |       | 2002* |   | 2001* |  | %2003 v2002 |       |  | %2002 v2001 |  
|Active Drilling Rigs:                             |  |       |       |       |   |       |  |             |       |  |             |   |  |       |   
|U.S.                                              |  |       | 1,032 |       |   | 831   |  |             | 1,155 |  | 24.2        | % |  | (28.1 | %)
|Canada                                            |  |       | 372   |       |   | 266   |  |             | 342   |  | 39.8        | % |  | (22.2 | %)
|International                                     |  |       | 771   |       |   | 732   |  |             | 745   |  | 5.3         | % |  | (1.7  | %)
|                                                  |  |       |       |       |   |       |  |             |       |  |             |   |  |       |   
|Worldwide                                         |  |       | 2,175 |       |   | 1,829 |  |             | 2,242 |  | 18.9        | % |  | (18.4 | %)
|                                                  |  |       |       |       |  
|Active Workover Rigs:                             |  |       |       |       |   |       |  |             |       |  |             |   |  |       |   
|U.S.                                              |  |       | 1,130 |       |   | 1,010 |  |             | 1,211 |  | 11.9        | % |  | (16.6 | %)
|Canada                                            |  |       | 350   |       |   | 261   |  |             | 342   |  | 34.1        | % |  | (23.7 | %)
|                                                  |  |       |       |       |   |       |  |             |       |  |             |   |  |       |   
|North America                                     |  |       | 1,480 |       |   | 1,271 |  |             | 1,553 |  | 16.4        | % |  | (18.2 | %)
|West Texas Intermediate Crude prices (per barrel) |  | $     | 30.89 |       | $ | 26.13 |  | $           | 25.93 |  | 18.2        | % |  | 0.8   | % 
|Natural Gas Prices ($/mbtu)                       |  | $     | 5.49  |       | $ | 3.35  |  | $           | 3.97  |  | 63.9        | % |  | (15.6 | %)
|*  Averages for the
years indicated.              | 



34



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The following table details the U.S., Canadian, and international rig activity and West Texas
Intermediate Oil prices for the three years ended December 31, 2003 on a quarterly basis:



LOGO



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



Oil and natural gas prices rose sharply in 2003
compared to 2002. The average price per barrel of West Texas Intermediate Crude was $30.89, an increase of 18.2% over the average for 2002. Natural gas prices were $5.49 per mbtu, an increase of 63.9% compared to the 2002 average. High commodity
prices led to the recent improvement in U.S., Canadian, and international rig activity, which began in the second half of 2002, and continued throughout 2003. U.S., Canadian, and international rig activity increased 24.2%, 39.8%, and 5.3%,
respectively, for the full year in 2003 compared to 2002. On a combined basis, worldwide rig activity increased 18.9% in 2003 compared to the prior year average. However, rig activity in several key operating locations including the Gulf of Mexico
and North Sea have remained sluggish. The Gulf of Mexico rig activity declined from an average of 109 rigs in 2002 to 104 rigs in 2003, while the North Sea average rig count dropped from a 2002 average of 52 rigs to an average of 46 rigs in 2003.



U.S. rig activity at February 20, 2004 was at 1,114 rigs,
compared to 1,126 rigs at December 31, 2003. The Company believes that current industry projections are forecasting commodity prices to remain strong as compared to recent years, and, as a result, U.S. and international drilling rig activity is
expected to continue to be strong. However, numerous events could significantly alter these projections including political tensions in the Middle East, the acceleration or deceleration of the recovery of the U.S. and world economies, a build up in
world oil inventory levels, or numerous other events or circumstances.



35



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Drilling Equipment Group Restructuring and MIL Impairment Charge



Drilling Equipment Group revenue declined $12.5 million (2.6%) in 2003.
Revenue was $474.2 million in 2003 compared to $486.7 million in 2002. The groups operating profit was down $33.8 million, from $71.6 million in 2002 to $37.8 million in 2003. Operating profit as a percent of revenue declined from 14.7% in
2002 to 8.0% in 2003.



The decline in the Drilling Equipment
Group operating profit reflects in part the softening market for capital drilling equipment in 2003 and into 2004, as well as adverse movements in the Companys mix of drilling equipment unit sales (rig floor equipment and handling tools
declined, while pressure control equipment sales increased). As a result of its lowered outlook for rig equipment sales, particularly in the offshore rig construction market, the Company has undertaken a significant restructuring of its Drilling
Equipment Group. Plans to reduce its technical and administrative workforce by approximately 200 employees are underway, and should be completed by the end of the second quarter 2004. The Company is consolidating certain sales, engineering and
administrative functions of the Drilling Equipment Group from California into Houston, and is moving certain manufacturing operations between its plants to improve efficiency. The Company expects to save approximately $20 million annually in
Drilling Equipment Group overhead expenses, and expects to recognize severance, relocation, and facility consolidation charges in the range of $5 million to $10 million related to these measures during the first half of 2004.



The significant decline in Drilling Equipment Group operating profit was also
caused by charges taken by its rig fabrication division, MIL. In 2003, MIL recognized $9.4 million in anticipated losses on a turnkey contract to construct a $31 million land drilling rig for the Middle East, and other operating losses of $5.8
million. The $9.4 million loss on the contract was due to (1) the structural complexity of the rig, which required substantially more material, fabrication, engineering and design work than originally planned; (2) underestimation of rig up and
commissioning costs; (3) delays in the project which resulted in late delivery penalties; and (4) adverse foreign currency exchange movements with the weakening of the U.S. dollar. Due to this poor financial performance, the Company has decided to
exit the rig fabrication business.



Acquired in September of
2001 for $11.8 million, MIL designs, fabricates and assembles structural drilling rig components such as masts, derricks and substructures. The acquisition of MIL was intended to expand the Companys sales of drilling equipment by packaging the
equipment with rigs fabricated by MIL. However, the Company determined that its integrated packages of drilling equipment and structural rig components bore too much risk, and failed to produce a sufficient economic return, and therefore, the
Company decided to exit the rig fabrication business and close the MIL facility in Great Yarmouth, England. As a consequence of this decision, the Company recognized a charge of $11.2 million related to goodwill and fixed asset impairments in the
fourth quarter of 2003. The combined effect of the impairment charge and losses from operations on earnings per share was a loss of $0.22 per share. The Company expects to incur additional exit costs and operating losses in 2004 related to the
winding up of the MIL business.



The MIL operation is expected
to be accounted for as a discontinued operation upon its shut down in 2004. The following summarizes the operations of MIL for the years ending December 31, 2003, 2002, and 2001 (in thousands).



|                                      |  |      |         |   |      |   |        |      |  |   |      
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | -----
|                                      |  | 2003 |         |   | 2002 |   |        | 2001
|Revenue                               |  | $    | 11,986  |   |      | $ | 12,698 |      |  | $ | 6,014
|                                      |  |      |         |   |      |   |        |      |  |   |      
|Operating income (loss)               |  | $    | (26,055 | ) |      | $ | (2,109 | )    |  | $ | 157  
|                                      |  |      |         |   |      |   |        |      |  |   |      
|Net income (loss) from MIL operations |  | $    | (21,589 | ) |      | $ | (1,476 | )    |  | $ | 110  
|                                      |  |      |         |   |      |   |        |      |  |   |      



36



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Results of Operations



Year Ended December 31, 2003 vs Year Ended December 31, 2002



Revenue.    The Companys total revenue was $1,449.6 million in 2003, an increase of $114.5
million (8.6%) over 2002 revenue of $1,335.1 million. The increase was due mainly to the acquisition of ICOs oilfield services business in September 2002 and increases in the Companys services business due to the increase in rig activity
discussed above. The Companys Tubular Services business increased $99.9 million (28.1%) and Drilling Services business increased $14.0 million (5.0%) in 2003 compared to 2002. In addition, the Companys Coiled Tubing and Wireline business
was also positively impacted by the increase in activity as revenue increased $13.1 million (6.1%) in 2003 compared to 2002. These results were offset to some extent by a decrease in Drilling Equipment Group revenue of $12.5 million (2.6%) in 2003
compared to 2002, which was primarily related to a decline in the sale of drilling units.



The following table summarizes the Companys revenue by operating segment in 2003 and 2002 (in thousands):



|                                  |  |      |           |      |   |           |   |   |         |   |  |       |  
|--------------------------------- |  | ---- | --------- | ---- | - | --------- | - | - | ------- | - |  | ----- | -
|                                  |  | 2003 |           | 2002 |   | Variance  |  
|                                  |  |      |           | $    |   |           | % |  
|Drilling Equipment Group          |  | $    | 474,173   |      | $ | 486,695   |   | $ | (12,522 | ) |  | (2.6% | )
|Tubular Services                  |  |      | 455,898   |      |   | 355,966   |   |   | 99,932  |   |  | 28.1% |  
|Drilling Services                 |  |      | 292,663   |      |   | 278,617   |   |   | 14,046  |   |  | 5.0%  |  
|Coiled Tubing & Wireline Products |  |      | 226,873   |      |   | 213,786   |   |   | 13,087  |   |  | 6.1%  |  
|                                  |  |      |           |      |   |           |   |   |         |   |  |       |  
|Total Revenue                     |  | $    | 1,449,607 |      | $ | 1,335,064 |   | $ | 114,543 |   |  | 8.6%  |  
|                                  |  |      |           |      |   |           |   |   |         |   |  |       |  



Revenue from the
Companys Drilling Equipment Group in 2003 was $474.2 million, a decrease of $12.5 million (2.6%) compared to 2002. The decrease was due to declines in shipments of capital equipment, including rig floor equipment, and handling tools of
$48.0 million. The Company shipped 56 top drives in 2003 compared to 75 top drives shipped in 2002. These declines were offset by increases in capital equipment sales of pressure control equipment of $19.0 million and increases in aftermarket
revenue including spares, service, repair and rental of $17.2 million. New orders for 2003 were $382.6 million compared to $453.3 million for the same period of 2002, while backlog at December 31, 2003 was $126.5 million compared to $218.1 million
at December 31, 2002. The decline in orders and backlog was reflective of fewer new rig construction projects and reduced capital investment in rig upgrades and refurbishments by drilling contractors in 2003 compared to 2002. In accordance with
industry practice, orders and commitments generally are cancelable by customers at any time.



Revenue from the Companys Tubular Services was $455.9 million in 2003, an increase of $99.9 million (28.1%) over 2002 results. Acquisitions for 2003 and 2002 resulted in an estimated incremental increase in
revenue of approximately $79.8 million in 2003 compared to 2002. The largest acquisition was ICOs oilfield services business on September 6, 2002. Excluding the impact from these acquisitions, Tubular Services revenue would have increased
$21.0 million (5.9%) in 2003 compared to the prior year. The increase in U.S., Canada, and Worldwide oilfield activity resulted in greater non-acquisition revenue from the Companys Inspection, Coating, and Fiberglass operations in 2003. These
increases were slightly offset by lower capital sales from the Companys Mill equipment sales operations and lower revenue from Pipeline services.



Revenue from the Companys Drilling Services was $292.7 million in 2003, an increase of $14.0 million (5.0%) compared to 2002 results. The increase
was primarily driven by greater revenue from the Companys U.S. and Canadian Instrumentation and Solid Control businesses, which increased a combined $24.9 million in 2003 compared to 2002. The U.S. and Canadian rig activity was up 24.2% and
39.8%, respectively, in 2003 compared to 2002. These increases were partially offset by lower revenue from the Companys Solids Control and Instrumentation capital equipment sales divisions, and lower revenue from Venezuela operations which was
a result of economic and political troubles in that country.



37



---

Coiled Tubing and Wireline Products revenue was $226.9 million in 2003, an increase of $13.1 million
(6.1%) in 2003 compared to 2002. The increase was primarily due to greater revenue from Companys Quality Tubing operations, which were up $9.2 million in 2003 as a result of the increased oilfield activity discussed above. In addition, the
Companys Coiled Tubing and Wireline business was up $3.9 million in revenue also benefiting from increased activity. Coiled Tubing and Wireline Products backlog at December 31, 2003 was $37.0 million, a decline of $12.1 million (24.6%)
compared to December 31, 2002.



Gross
Profit.    Gross profit was $393.5 million (27.1% of revenue) in 2003 compared to $383.0 million (28.7% of revenue) in 2002. The increase in gross profit dollars was due to the $114.5 million (8.6%) increase in revenue. The
decrease in gross profit percent was due to lower margins in the Drilling Equipment Group discussed above and operating losses related to the MIL operations.



Selling, General, and Administrative Costs.    Selling, general, and administrative costs were $180.8 million in 2003, an
increase of $17.5 million (10.7%) over 2002 costs of $163.4 million. The increase was due primarily to the acquisitions in 2003 and 2002. In addition, the Companys insurance costs, legal expenses, and fringe benefit costs were also greater in
2003 than 2002. As a percent of revenue, selling, general, and administrative costs were 12.5% of revenue in 2003 compared to 12.2 % of revenue in 2002.



Research and Engineering Costs.    Research and engineering costs were $61.5 million in 2003, an increase of $4.4 million
(7.8%) compared to 2002 results. The increase was spread out between all four major operating segments and was primarily related to new product development and integration, and acquisitions completed in 2003 and 2002.



Merger, Transaction, Impairment and Litigation
Costs.    Merger, transaction, impairment, and litigation costs were $11.2 million and $6.5 million for December 31, 2003 and 2002, respectively. The impairment charge of $11.2 million was related to goodwill and fixed asset
impairments associated with the MIL operations in the fourth quarter 2003. The 2002 costs consisted of two components; $3.7 million of transaction costs associated with the acquisition of substantially all of the oilfield services business of ICO
(see Note 3 of Notes to Consolidated Financial Statements) and $2.8 million of severance costs.



Operating Profit.    Operating profit was $140.0 million for 2003 compared to $156.1 million for 2002. Excluding merger,
transaction, impairment and litigation costs, operating profit was $151.2 million (10.4% of revenue) for 2003 compared to $162.6 million (12.2% of revenue) for 2002. The 2003 operating profit included losses from the MIL operations (excluding
impairment charges) of $14.9 million. Excluding MIL operations, operating profit was $166.1 million, or 11.6% of revenue in 2003. The decline in operating profit percent in 2003 compared to 2002 was due to weak margins in the Drilling Equipment
Group discussed above. Operating profit percents in Drilling Services and Coiled Tubing and Wireline both improved in 2003, while Tubular Services was approximately flat as compared to 2002.



Interest Expense.    Interest expense was $30.2
million in 2003 compared to $25.6 million in 2002. The increase in interest expense was due to greater average outstanding debt balances as a result of the $150.0 million Senior Notes issued in November 2002.



Other Expense (Income).    Other expense includes
interest income, foreign exchange losses and gains, and other expense (income). Net other expense was $2.2 million in 2003 compared to $7.7 million in 2002. The improvement in other expense in 2003 was primarily due to $5.2 million in foreign
exchange losses in 2002 compared to a $1.1 million gain in 2003. The 2002 losses occurred in the third quarter of 2002 due mostly to foreign exchange losses in Venezuela, the second quarter of 2002 due mostly to the weakening of the U.S. dollar
against the euro dollar and UK pound sterling, and the first quarter 2002 due mostly to foreign exchange losses in Argentina as a result of the devaluation of the Argentine peso in the first quarter of 2002.



Provision for Income Taxes.    The Company
recorded a tax provision of $40.3 million (37.5% of pre-tax income) and $43.0 million (35% of pre-tax income) for the years ended December 31, 2003 and 2002,



38



---

respectively. The 2003 tax provision was higher than the domestic tax rate of 35% due to deductions not allowed under domestic and foreign jurisdictions
related to the asset impairment charge on its investment in its drilling rig fabrication business, and to foreign earnings subject to tax rates differing from domestic rates. The Company partially offset these increases by the benefit from its
utilization of the extraterritorial income provisions, increased research and development credits and the resolution of a prior year tax audit.



The European Union has put into place a process to begin imposing sanctions on U.S. exports effective March 1, 2004, if Congress does not repeal the
extraterritorial tax regime (ETI). There are proposals before the U.S. Senate and U.S. House of Representatives, but no resolution has been determined as of February 2004. The Company has utilized the ETI regime in prior years in
reducing its U.S. tax attributable to its export sales. The repeal of the ETI regime would have an adverse impact on the net income in the range of $0.2 million to $2.5 million on the projected 2004 export sales by the Company. It is not
determinable the impact of the export sanctions would have on the Companys operating profit.



Net Income.    Net income was $67.2 million and $79.8 million for 2003 and 2002, respectively. The decrease in net income was
due to the factors discussed above.



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



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



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



|                                  |  |      |           |      |   |           |   |   |         |   |  |       |   
|--------------------------------- |  | ---- | --------- | ---- | - | --------- | - | - | ------- | - |  | ----- | --
|                                  |  | 2002 |           | 2001 |   | Variance  |  
|                                  |  |      |           | $    |   |           | % |  
|Drilling Equipment Group          |  | $    | 486,695   |      | $ | 395,550   |   | $ | 91,145  |   |  | 23.0  | % 
|Tubular Services                  |  |      | 355,966   |      |   | 352,624   |   |   | 3,342   |   |  | 0.9   | % 
|Drilling Services                 |  |      | 278,617   |      |   | 314,272   |   |   | (35,655 | ) |  | (11.3 | %)
|Coiled Tubing & Wireline Products |  |      | 213,786   |      |   | 205,363   |   |   | 8,423   |   |  | 4.1   | % 
|                                  |  |      |           |      |   |           |   |   |         |   |  |       |   
|Total Revenue                     |  | $    | 1,335,064 |      | $ | 1,267,809 |   | $ | 67,255  |   |  | 5.3   | % 
|                                  |  |      |           |      |   |           |   |   |         |   |  |       |   



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



Revenue from the Companys Tubular Services was $356.0 million in 2002, an increase of $3.3 million (0.9%) over 2001 results. Acquisitions for 2002
and 2001 resulted in an estimated incremental increase in revenue of approximately $43.5 million in 2002 compared to 2001. The largest acquisition was ICOs oilfield services business on September 6, 2002. Excluding the impact from these
acquisitions, Tubular Services revenue would have declined $40.2 million (11%) in 2002 compared to 2001. The major reason for the non acquisition



39



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decline was lower rig activity in the U.S., which was down 28.1% in 2002 compared to 2001. This resulted in a decrease of $28.0 million (25.3%) in U.S.
inspection and coating revenue (excluding the impact from acquisitions). In addition, lower rig activity resulted in a $15.3 million decline in revenue from the Companys Fiberglass operations in 2002 compared to 2001 (excluding the estimated
impact of $7.7 million in revenue from acquisitions).



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



Coiled Tubing and Wireline Products revenue was $213.8 million in 2002, an increase of $8.4 million in 2002 compared to 2001. The increase was due to the acquisition of three companies in 2001, which contributed
estimated incremental revenue of approximately $32.1 million in 2002 compared to 2001. Excluding the estimated impact of these acquisitions, Coiled Tubing and Wireline Products revenue would have decreased $23.7 million (12%) in 2002 compared to
2001. The lower market activity resulted in lower revenue in the Companys Coiled Tubing related products. Coiled Tubing and Wireline Products backlog at December 31, 2002 was $49.1 million, a decline of $6.8 million (12%) compared to December
31, 2001 further reflecting the declining market activity in 2002. However, sequentially from the third quarter of 2002, backlog increased $8.2 million (20%) due to the recent increase in market activity discussed above.



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



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



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



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



40



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



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



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



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



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



Financial Condition and Liquidity



At December 31, 2003, the Company had cash and cash equivalents of $85.7
million, and total debt of $456.9 million. At December 31, 2002 cash and cash equivalents were $106.0 million, and total debt was $467.9 million. The Companys outstanding debt at December 31, 2003 consisted of $201.2 million of 71⁄4%
Senior Notes due 2011, $149.3 million of 51⁄2% Senior Notes due 2012, $95.3 million of 71⁄2% Senior Notes due 2008, and other debt of $11.1 million.



For the fiscal year ended December 31, 2003, cash provided by operating activities was $100.8 million compared to $101.8 million for 2002. Cash was
provided by operations primarily through net income of $67.2 million plus non-cash charges of $97.0 million. In addition, cash was provided by an increase in accounts payable and accrued liabilities of $12.6 million. The increase in accounts
payable and accrued liabilities was due to an increase in insurance accruals, employee benefit accruals, and acquisition related accruals. These items were offset by an increase in inventory of $64.2 million, and an increase in accounts receivable
of $10.8 million. The increase in inventory was related primarily to the construction of a land drilling rig for a customer, as well as an increase in Drilling Equipment and Coiled Tubing & Wireline inventory. The increase in accounts receivable
was due to an increase in days sales outstanding, which was up from 83.9 days outstanding at December 31, 2002 to 87.3 days outstanding at December 31, 2003.



For the fiscal year ended December 31, 2003, cash used for investing activities was $106.6 million compared to $202.3 for the same period of 2002. The
Company used approximately $39.0 million of cash for 13 acquisitions during 2003 and cash paid in 2003 for 2002 acquisitions. See Note 3 of Notes to the Consolidated Financial Statements. Capital spending of $67.1 million was primarily related
to rental equipment for the Companys Solids Control operations and Top Drive businesses, Tubular Services ultrasonic inspection equipment, and $12.9 million of purchased facilities and equipment previously leased.



41



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For the fiscal year ended December 31, 2003, the Company used $15.2 million of cash for financing
activities. Cash was used for net payments on outstanding debt of $8.5 million and the purchase of treasury stock of $15.0 million. This use of cash was offset to some degree with proceeds from the sale of stock of $8.4 million.



On January 30, 2002 the Company entered into a credit agreement with a
syndicate of banks that provided up to $125.0 million of funds under a revolving credit facility and $5 million under a bilateral letter of credit facility with a separate bank. The agreement was amended on September 5, 2002 with the available
revolving funds increased to $150.0 million. The facility expires on January 30, 2005. The facility is secured by guarantees of material U.S. subsidiaries. The interest rate on the borrowed portion of the revolver is based on the Companys
rating by S&P and Moodys, which at the time of the agreement resulted in an interest rate of Libor + 0.625% or the prime rate. Commitment fees range from 0.1% to 0.25% depending on the Company rating. At December 31, 2003, there were
$139.1 million of funds available under the revolving credit facility and $2.5 million of funds available under the bilateral letter of credit facility, with $10.9 million and $2.5 million being used for letters of credit, respectively. The Company
also has $17.0 million of additional outstanding letters of credit at December 31, 2003 that is not secured by the Companys senior credit facility.



The Company believes that its December 31, 2003 cash and cash equivalents, its outstanding credit facility, and cash flow from operations will be
sufficient to meet its capital expenditures and its operating cash needs for the foreseeable future.



A summary of the Companys outstanding contractual obligations at December 31, 2003 is as follows (in thousands):



|                              |  |       |         |                        |   |           |  |           |        |              |   |         |  |   |        
|----------------------------- |  | ----- | ------- | ---------------------- | - | --------- |  | --------- | ------ | ------------ | - | ------- |  | - | -------
|                              |  |       |         | Payments Due by Period
|                              |  | Total |         | Less than1 Year        |   | 2-3 Years |  | 4-5 years |        | After 5years
|Total Debt                    |  | $     | 456,918 |                        | $ | 6,447     |  | $         | 4,680  |              | $ | 95,299  |  | $ | 350,492
|Operating Leases              |  |       | 91,160  |                        |   | 23,504    |  |           | 29,846 |              |   | 14,054  |  |   | 23,756 
|                              |  |       |         |                        |   |           |  |           |        |              |   |         |  |   |        
|Total contractual obligations |  | $     | 548,078 |                        | $ | 29,951    |  | $         | 34,526 |              | $ | 109,353 |  | $ | 374,248
|                              |  |       |         |                        |   |           |  |           |        |              |   |         |  |   |        
|Standby Letters of Credit     |  | $     | 30,364  |                        | $ | 25,851    |  | $         | 4,513  |              | $ |        |  | $ |       
|                              |  |       |         |                        |   |           |  |           |        |              |   |         |  |   |        



As of December 31,
2003, the Company has outstanding non-cancelable purchase order commitments of approximately $6.3 million related to special order raw materials due in 2004. Purchase order commitments subsequent to 2004 are less than $0.5 million on an annual
basis. The Companys projected post-retirement cash payments are expected to approximate $1.5 million to $2.0 million annually for the next five years.



Critical Accounting Policies and Estimates



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



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



42



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



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



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



Pensions and Other Postretirement Benefits



The Company sponsors several pension and postretirement plans. The Company has two defined benefit pension plans covering substantially all of its
employees in Germany (German Plans), a plan providing healthcare and life insurance benefits to certain executives and former retired employees (Retiree Medical Plan) and a supplemental executive retirement plan (SERP). These plans are unfunded. See
additional disclosure in Note 9 to the Consolidated Financial Statements.



The Company accounts for its defined benefit pension plans and its nonpension postretirement benefit plans using actuarial models required by Statement of Financial Accounting Standards (SFAS) No. 87,
Employers Accounting for Pensions and SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, respectively.



A significant element in determining the Companys expense in accordance with SFAS No. 87 and SFAS No. 106 is the
discount rate. The discount rate is an estimate of the current interest rate at which the pension and postretirement liabilities could be effectively settled at the end of the year. In estimating this rate, the Company looks to rates of return on
high-quality, fixed-income investments currently available and expected to be available during the period to maturity of the pension and postretirement benefit obligation. Changes in the discount rates over the past three years have not materially
affected pension expense and the net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, have been deferred in accordance with SFAS No. 87 and SFAS No. 106. The Companys
discount rates ranged from 6.5% to 6.75% at December 31, 2003 and 2002. For 2004, the Company does not expect any changes in its discount rates.



Additionally, the health care cost trend rate can have a significant effect on the Companys expense for the Retiree Medical plan as reported in
accordance with SFAS No. 106. The Company, in conjunction with its actuary reviews external data and its own historical trends for health care costs to determine the health care cost trend rates. The assumed health care cost trend rate for 2003 is
10% and is assumed to decrease gradually to 5% for 2008 and remain at that level thereafter. An increase of the health care cost trend rates by one percentage point each year would increase the accumulated postretirement benefit obligation as of
December 31, 2003 by $670,721 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 2003 by $45,000.



43



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Pension and postretirement benefit expense for these plans was $3.6 million, $2.7 million, and $1.8
million for the years ended December 31, 2003, 2002, and 2001, respectively. Cash payments for these plans were $1.7 million, $0.9 million, and $1.3 million for the years ended December 31, 2003, 2002, and 2001, respectively.



Recent Accounting Pronouncements



In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146) which addresses financial accounting and reporting costs associated with exit or disposal activities. SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previously, a liability for an exit cost was recognized at the date of an entitys commitment to an exit plan. The provisions
of this Statement were effective for exit or disposal activities that were initiated after December 31, 2002.



In January 2003, FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) was issued. FIN 46 requires the
consolidation of each variable interest entity (VIE) in which an enterprise absorbs a majority of the entitys expected losses or receives a majority of the entitys expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. The FASB has delayed the implementation date of FIN 46 to the first interim period ending after March 15, 2004. The Company does not believe the adoption of FIN 46 will have a material effect
on the Companys financial statements.



In December 2003,
President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. The Company expects that this
legislation will eventually reduce some of the costs for the Companys Retiree Medical Plan. The Company is awaiting guidance from various governmental and regulatory agencies concerning the requirements that must be met to obtain these cost
reductions, as well as the manner in which such savings should be measured. Because of the various uncertainties related to the Companys response to this legislation and the appropriate accounting methodology for this event, the Company
elected to defer financial recognition of this legislation until the FASB issues final accounting guidance. When issued, that final guidance could require the Company to change previously reported information. This deferral is permitted under FASB
Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.



Other



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



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.



44



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



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



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



The Companys solids
control, inspection and coating services routinely involve the handling of waste materials, some of which may be considered to be hazardous wastes. The Company is subject to numerous local, state and federal laws and regulations concerning the
containment and disposal of materials, pursuant to which the Company has been required to incur compliance and clean-up costs, which were not substantial in 2003, 2002, and 2001. 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
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.



Many of the Companys oilfield markets for equipment, products and services are predominately priced in U.S. dollars, although some portion may be in local currencies. The Company conducts manufacturing and service operations through
foreign locations, and, as a result, has significant costs denominated in local currencies that often exceed the mix of local currency revenue. Consequently, the recent weakening of the U.S. dollar against the Euro, the British Pound and other
currencies has resulted in higher costs of sales and services for some of the Companys business in England, the EEC and other areas, when these costs are converted to U.S. dollars. This is partially but not completely offset by higher foreign
currency revenue, when converted to U.S. dollars. Overall, the weakening of the U.S. dollar reduced the Companys operating profits and margins. This effect on consolidated operating income is offset somewhat by the Companys position in
Canada, where a portion of its costs are in U.S. dollars, but nearly all of its revenues are in Canadian dollars. As a result,



45



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the Companys Canadian operations have benefited from the weakening U.S. dollar. The net impact of the weaker U.S. dollar compared to foreign currencies
where the Company operates (including the EURO, British Pound, Norwegian Kroner, Canadian dollar and Singapore dollar) is expected to adversely impact operating profit in the range of $5.0 million to $10.0 million in 2004 compared to 2003 based on
current exchange rates. Further adverse foreign currency exchange rate movements could result in additional operating profit declines.



ITEM 7A.    QUANTITATIVE & QUALITATIVE DISCLOSURE ABOUT MARKET RISK



The Company conducts operations in various countries around the world and is exposed to market risk from changes in interest
rates and changes in foreign currency rates. The Company does not believe that it has a material exposure to market risk. The Company does not enter into interest rate or foreign currency transactions for speculative purposes.



Interest Rates



The Company has historically managed its exposure to interest rate changes by using a combination of fixed rate debt,
variable rate debt, and interest swap and collar agreements in its total debt portfolio. At December 31, 2003, the Company had $456.9 million of outstanding debt. Fixed rate debt included $150.0 million of the 2012 Notes at a fixed interest rate of
5.5%, $200.0 million of the 2011 Notes at a fixed interest rate of 7.25% and $100.0 million of the 2008 Notes at a fixed interest rate of 7.5%.



As of December 31, 2003, the Company had three interest rate swap agreements with an aggregate notional amount of $100.0 million associated with the
Companys 2008 Notes. Under this agreement, the Company receives interest at a fixed rate of 7.5% and pays interest at a floating rate of six-month LIBOR plus a weighted average spread of approximately 4.675%. The swap agreements will settle
semi-annually and will terminate in February 2008. An increase in outside market interest rates of 1% would result in a $1.0 million increase to the Companys annual interest expense.



Foreign Currency Exchange Rates



With respect to foreign currency fluctuations, the Company uses natural
hedges to minimize the effect of rate fluctuations. When natural hedges are not sufficient, the Company may enter into forward foreign exchange contracts to hedge significant transactions for periods consistent with the underlying risk. The Company
had no forward foreign exchange contracts outstanding at December 31, 2003.



The Company has market risk sensitive instruments denominated in foreign currencies totaling $23.7 million as of December 31, 2003, excluding trade receivables and payables, which approximate fair value. These
market risk sensitive instruments consisted of cash balances and overdraft facilities. The Company estimates that a hypothetical 10% movement of foreign currency exchange rates would affect net income by approximately $1.5 million.



Because the Company operates in virtually every oil and gas exploration and
production region in the world, it conducts a portion of its business in currencies other than the U.S. dollar. The functional currency for some of the Companys international operations is the applicable local currency. Although some of the
Companys international revenues are denominated in the local currency, the effects of foreign currency fluctuations are partly mitigated because local expenses of such foreign operations are also generally denominated in the same currency.
During the years ended December 31, 2003, 2002 and 2001, the Company reported foreign currency gains (losses) of $1.1 million, ($5.2 million) and $71,000, respectively. The gains and losses were primarily due to exchange rate fluctuations related to
monetary asset balances denominated in currencies other than the functional currency.



Assets and liabilities of our foreign subsidiaries are translated using the exchange rates in effect at the balance sheet date, resulting in translation adjustments that are reflected in accumulated other
comprehensive



46



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loss in the common stockholders equity section of the Companys balance sheet. The Company recorded currency translation gains (losses) of $12.4
million, ($0.8 million) and ($2.1 million) for the years ended December 31, 2003, 2002 and 2001 related to these translations.



ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



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



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



None.



ITEM 9A.    CONTROLS AND PROCEDURES



The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Companys Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives. Also, we have investments in certain unconsolidated entities. As
we do not control or manage these entities, our disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.



As required by SEC Rule 13a-15(b), the Company carried out an evaluation,
under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and the Companys Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective at the reasonable assurance level.



There has been no change in the Companys internal controls over financial reporting during the Companys most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Companys internal controls over financial reporting.



47



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PART III



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The registrant has adopted a code of business conduct and ethics that applies to all officers and employees of the
registrant and its subsidiaries. The code of business conduct and ethics can be found on the registrants website located at http://www.varco.com. Any amendment to or waiver from the code of business conduct and ethics that applies to
executive officers will be disclosed to the public.



The
remaining information required by this Item is incorporated by reference to the registrants definitive proxy statement for its 2004 Annual Meeting to be filed with the Securities and Exchange Commission (the Commission) pursuant to
regulation 14A within 120 days after the end of the fiscal year covered by this report (the Varco Proxy Statement).



ITEM 11.    EXECUTIVE COMPENSATION



The information required by this Item is incorporated by reference to the Varco Proxy Statement.



ITEM 12.    SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The information required by this Item is incorporated by reference to the Varco Proxy Statement.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by this Item is incorporated by reference to the Varco Proxy Statement.



ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by this item is incorporated by reference to the
Varco Proxy Statement.



48



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PART IV



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



(a)(1)  Financial Statements of the Company



|                                                                                                                                      |  |         
|------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                                                                                                                                      |  | Page    
|Report of Independent Auditors                                                                                                        |  | F-1     
|Consolidated Balance Sheets at December 31, 2003 and 2002                                                                             |  | F-2     
|Consolidated Statements of Income for the years ended December 31, 2003, 2002, and 2001                                               |  | F-3     
|Consolidated Statements of Common Stockholders Equity and Comprehensive Income for the years ended December 31, 2003, 2002, and
2001 |  | F-4     
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001                                           |  | F-5     
|Notes to Consolidated Financial Statements                                                                                            |  | F-6F-34



(2)  Financial Statement Schedules:



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



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



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



(3)The list of exhibits contained in the Index to Exhibits are filed as part of this ReportPage 50.



(b)  Reports on Form 8-K



On October 30, 2003, the Company filed a Form 8-K current report for the results of operations for the quarter ended
September 30, 2003.



49



---

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                     |  |          
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                         |  | Note No. 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|3.1         |  | Third Amended and Restated Certificate of Incorporation of Varco International, Inc., dated May 30, 2000.                                                                                                                                                                                                                                                                                                           |  | (Note 1) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|3.2         |  | Third Amended and Restated Bylaws.                                                                                                                                                                                                                                                                                                                                                                                  |  | (Note 1) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|3.3         |  | Certificate of Designations of Series A Junior Participating Preferred Stock of Varco International, Inc., dated November 30,
2000.                                                                                                                                                                                                                                                                                 |  | (Note 1) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.1         |  | Rights Agreement, dated as of November 29, 2000, by and between the Company and Chase Mellon Shareholder Services, L.L.C., as Rights Agent,
which includes the form of Certificate of Designations of the Series A Junior Participating Preferred Stock of Varco International, Inc. as Exhibit A, the form of Right Certificate as Exhibit B, and the Summary of Rights to Purchase Preferred Shares
as Exhibit C. |  | (Note 1) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.2         |  | Purchase Agreement dated as of October 1, 1991 between the Company and Baker Hughes Incorporated regarding certain registration
rights.                                                                                                                                                                                                                                                                             |  | (Note 2) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.3         |  | Registration Rights Agreement dated April 24, 1996 among the Company, SCF III, L.P., D.O.S. Partners L.P., Panmell (Holdings), Ltd. And
Zink Industries Limited.                                                                                                                                                                                                                                                    |  | (Note 3) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.4         |  | Registration Rights Agreement dated March 7, 1997 among the Company and certain stockholders of Fiber Glass Systems, Inc.                                                                                                                                                                                                                                                                                           |  | (Note 4) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.5         |  | Indenture, dated as of February 25, 1998, between the Company, the Guarantors named therein and The Bank of New York as trustee, relating
to $100,000,000 aggregate principal amount of 7.5% Senior Notes due 2008; Specimen Certificate of 7.5% Senior Notes due 2008 (private notes); and Specimen Certificate at 7.5% Senior Notes due 2008 (public notes).                                                      |  | (Note 5) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.6         |  | Indenture, dated as of May 1, 2001, among the Company, the Guarantors named therein and The Bank of New York as trustee, relating to
$200,000,000 aggregate principal amount of 7.25% Senior Notes due 2011; Specimen Certificate of 7.25% Senior Notes due 2011 (private notes); and Specimen Certificate of 7.25% Senior Notes due 2011 (public notes).                                                           |  | (Note 6) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.7         |  | Indenture, dated as of November 19, 2002, between the Company, the guarantors named therein and The Bank of New York Trust Company of
Florida as trustee, relating to $150,000,000 aggregate principal amount of 5.5% Senior Notes due 2012 (private notes) Specimen Certificate of 5.5% Senior Notes due 2012 (private notes); and Specimen Certificate of 5.5% Senior Notes due 2012 (public
notes).              |  | (Note 7) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.8         |  | Registration Rights Agreement dated as of November 19, 2002, among the Company and Salomon Smith Barney Inc.                                                                                                                                                                                                                                                                                                        |  | (Note 7) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.1        |  | Credit Agreement, dated as of January 30, 2002, among the Company, as the Borrower, Wells Fargo Bank Texas, National Association, as
Administrative Agent, Bank One, NA, as Syndication Agent, Credit Suisse First Boston, Cayman Islands Branch, as Documentation Agent, and the other Banks a party thereto.                                                                                                      |  | (Note 8) 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.2*       |  | Varco International, Inc. Deferred Compensation Plan (effective January 1, 2003)                                                                                                                                                                                                                                                                                                                                    |  | (Note 23)
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.3*       |  | 2003 Equity Participation Plan of Varco International, Inc.                                                                                                                                                                                                                                                                                                                                                         |  | (Note 24)
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.3.1*     |  | Form of Non-qualified Stock Option Agreement for Employees and Consultants; Form of Non-qualified Stock Option Agreement for Independent
Directors.                                                                                                                                                                                                                                                                 |  | (Note 22)
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.4*       |  | Amended and Restated Stock Option Plan for Key Employees of Tuboscope Vetco International Corporation; Form of Revised Incentive Stock
Option Agreement; and Form of Revised Non-Qualified Stock Option Agreement.                                                                                                                                                                                                  |  | (Note 9) 



50



---

|            |  |                                                                                                                                              |  |          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|Exhibit No. |  | Description                                                                                                                                  |  | Note No. 
|            |  |                                                                                                                                             
|10.5*       |  | Stock Option Plan for Non-Employee Directors; Amendment to Stock Option Plan for Non-Employee Directors; and Form of Stock Option
Agreement. |  | (Note 10)
|            |  |                                                                                                                                             
|10.6*       |  | Amendment and Restatement of the Varco International, Inc. Supplemental Executive Retirement Plan (effective as of November 15,
2001)        |  | (Note 23)
|            |  |                                                                                                                                             
|10.7        |  | Lease dated March 7, 1975, as amended                                                                                                        |  | (Note 11)
|            |  |                                                                                                                                             
|10.7.1      |  | Agreement dated as of January 1, 1982, with respect to Lease included as Exhibit 10.8                                                        |  | (Note 12)
|            |  |                                                                                                                                             
|10.7.2      |  | Agreement dated as of January 1, 1984, with respect to Lease included as Exhibit 10.8                                                        |  | (Note 13)
|            |  |                                                                                                                                             
|10.7.3      |  | Agreement dated as of February 8, 1985, with respect to Lease included as Exhibit 10.8                                                       |  | (Note 13)
|            |  |                                                                                                                                             
|10.7.4      |  | Agreement dated as of April 12, 1985, with respect to Lease included as Exhibit 10.8                                                         |  | (Note 14)
|            |  |                                                                                                                                             
|10.7.5      |  | Amendment dated as of January 11, 1996, with respect to Lease included as Exhibit 10.8                                                       |  | (Note 15)
|            |  |                                                                                                                                             
|10.8        |  | Standard Industrial Lease-Net dated September 29, 1988 for the premises at 743 N. Eckhoff, Orange, California                                |  | (Note 16)
|            |  |                                                                                                                                             
|10.8.1      |  | First amendment dated as of January 11, 1996 to Lease included as Exhibit 10.9                                                               |  | (Note 15)
|            |  |                                                                                                                                             
|10.9*       |  | The Varco International, Inc. 1990 Stock Option Plan, as amended                                                                             |  | (Note 17)
|            |  |                                                                                                                                             
|10.9.1*     |  | Amendments to the Varco International, Inc. 1990 Stock Option Plan                                                                           |  | (Note 18)
|            |  |                                                                                                                                             
|10.10*      |  | Varco International, Inc. 1994 Directors Stock Option Plan                                                                                  |  | (Note 15)
|            |  |                                                                                                                                             
|10.10.1*    |  | Amendment to Varco International, Inc. 1994 Directors Stock Option Plan                                                                     |  | (Note 19)
|            |  |                                                                                                                                             
|10.11*      |  | Amendment and Restatement of the Varco International, Inc. Executive Retiree Medical Plan (effective as of November 15,
2001)                |  | (Note 23)
|            |  |                                                                                                                                             
|10.12       |  | Master Leasing Agreement, dated December 18, 1995 between the Company and Heller Financial Leasing, Inc.                                     |  | (Note 20)
|            |  |                                                                                                                                             
|10.13*      |  | Form of Executive Agreement of certain members of senior management                                                                          |  | (Note 21)
|            |  |                                                                                                                                             
|10.13.1*    |  | Form of First Amendment to Executive Agreements                                                                                              |  | (Note 21)
|            |  |                                                                                                                                             
|10.14*      |  | Executive Agreement of John F. Lauletta                                                                                                      |  | (Note 21)
|            |  |                                                                                                                                             
|10.15*      |  | Executive Agreement of Joseph C. Winkler                                                                                                     |  | (Note 21)
|            |  |                                                                                                                                             
|10.16*      |  | Agreement with George Boyadjieff dated November 29, 2002                                                                                     |  | (Note 23)
|            |  |                                                                                                                                             
|10.17*      |  | Form of Indemnity Agreement                                                                                                                  |  | (Note 21)
|            |  |                                                                                                                                             
|12          |  | Computation of Ratio of Earnings to Fixed Charges                                                                                            |  |          
|            |  |                                                                                                                                             
|21          |  | Subsidiaries                                                                                                                                 |  |          
|            |  |                                                                                                                                             
|23          |  | Consent of Ernst & Young LLP                                                                                                                 |  |          
|            |  |                                                                                                                                             
|31.1        |  | Rule 13a/15d-15(e)Certification of Chief Executive Officer                                                                                   |  |          
|            |  |                                                                                                                                             
|31.2        |  | Rule 13a 15d-15(e) Certification of Chief Financial Officer                                                                                  |  |          
|            |  |                                                                                                                                             
|32.1(+)     |  | Section 1350 Certification of Chief Executive Officer                                                                                        |  |          
|            |  |                                                                                                                                             
|32.2(+)     |  | Section 1350 Certification of Chief Financial Officer                                                                                        |  |          



51



---

---

For purposes of this list of exhibits and the notes below,
the term Company refers to the registrant, Varco International, Inc., a Delaware corporation formerly known as Tuboscope Inc., and the term Varco refers to Varco International, Inc., a California corporation which merged with
and into the registrant on May 30, 2000.



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

|(+) |  | In accordance with SEC Release No. 33-8212, this exhibit is being furnished, and is not being filed as part of this report or as a separate disclosure document, and is not being
incorporated by reference into any Securities Act of 1933 registration statement.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Table of Contents



|        |  |                                                                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Note 1  |  | Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filed on March
9, 2001. 
|        | 
|Note 2  |  | Incorporated by reference to the Companys Registration Statement on Form S-1 (No. 33-43525), filed on October 24,
1991.                   
|        | 
|Note 3  |  | Incorporated by reference to the Companys Current Report on Form 8-K, filed on January 16, 1996.                                          
|        | 
|Note 4  |  | Incorporated by reference to the Companys Current Report on 8-K, filed on March 20, 1997.                                                 
|        | 
|Note 5  |  | Incorporated by reference to the Companys Registration Statement on Form S-4 (No. 333-51115), filed on April 27,
1998.                    
|        | 
|Note 6  |  | Incorporated by reference to the Companys Registration Statement on Form S-4 (No. 333-64226), filed on June 29,
2001.                     
|        | 
|Note 7  |  | Incorporated by reference to the Companys Registration Statement on Form S-4 (No. 333-102162), filed on December 23,
2002.                
|        | 
|Note 8  |  | Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed on March
11, 2002.
|        | 
|Note 9  |  | Incorporated by reference to the Companys Registration Statement on Form S-8 (No. 33-72150), filed on November 24,
1993.                  
|        | 
|Note 10 |  | Incorporated by reference to the Companys Registration Statement on Form S-8 (No. 33-72072), filed on November 23,
1993.                  
|        | 
|Note 11 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the year ended December 31, 1981, filed on March 18,
1982.             
|        | 
|Note 12 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the fiscal year ended December 31, 1982, filed on March 29,
1983.      
|        | 
|Note 13 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the fiscal year ended December 31, 1984, filed on March 29,
1985.      
|        | 
|Note 14 |  | Incorporated by reference to Varcos Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1985, filed on July 30,
1985.     
|        | 
|Note 15 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed on March 29,
1996.      
|        | 
|Note 16 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the fiscal year ended December 31, 1988, filed on March 30,
1989.      
|        | 
|Note 17 |  | Incorporated by reference to Varcos Registration Statement on Form S-8, Registration No. 333-21681, filed on February 12,
1997.           
|        | 
|Note 18 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the year ended December 31, 1999, filed on March 24,
2000.             



52



---

|        |  |                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|Note 19 |  | Incorporated by reference to Varcos Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed on March 26,
1998.               
|        | 
|Note 20 |  | Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed on March
21, 1996.         
|        | 
|Note 21 |  | Incorporated by reference to the Companys Registration Statement of Form S-4 (333-34582), filed on April 12,
2000.                                 
|        | 
|Note 22 |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002, filed on
November 8, 2002.
|        | 
|Note 23 |  | Incorporated by reference to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed on March
28, 2003.         
|        | 
|Note 24 |  | Incorporated by reference to the Companys Quarterly Report on Form 10Q for the fiscal quarter ended March 31, 2003, filed on May
20, 2003.         



53



---

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



|                     |  |  |  |                           |  |                         |  |                                                                   
|-------------------- |  |  |  | ------------------------- |  | ----------------------- |  | ------------------------------------------------------------------
|                     |  |  |  | VARCO INTERNATIONAL, INC.
|                     |  |  | 
|Dated: March 4, 2004 |  |  |  | By:                       |  | /s/    JOHN F.
LAULETTA
|                     |  |  |  |                           |  |                         |  | John F. Lauletta Chairman of the Board and Chief Executive Officer



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



|                                                |  |                                                             |  |              
|----------------------------------------------- |  | ----------------------------------------------------------- |  | -------------
|Signature                                       |  | Title                                                       |  | Date         
|                                                |  |                                                            
|/s/    GEORGE I.
BOYADJIEFFGeorge I.
Boyadjieff |  | Director, Retired Chairman of the Board                     |  | March 4, 2004
|                                                |  |                                                            
|/s/    JOHN F.
LAULETTAJohn F. Lauletta         |  | Director, Chairman of the Board and Chief Executive Officer |  | March 4, 2004
|                                                |  |                                                            
|/s/    JOSEPH C.
WINKLERJoseph C. Winkler       |  | President and Chief Operating Officer                       |  | March 4, 2004
|                                                |  |                                                            
|/s/    CLAY C.
WILLIAMSClay C. Williams         |  | Vice President and Chief Financial Officer                  |  | March 4, 2004
|                                                |  |                                                            
|/s/    ROBERT W.
BLANCHARDRobert W.
Blanchard   |  | Principal Accounting Officer                                |  | March 4, 2004
|                                                |  |                                                            
|/s/    GEORGE S.
DOTSONGeorge S. Dotson         |  | Director                                                    |  | March 4, 2004
|                                                |  |                                                            
|/s/    RICHARD A.
KERTSONRichard A.
Kertson     |  | Director                                                    |  | March 4, 2004
|                                                |  |                                                            
|/s/    ERIC L.
MATTSONEric L. Mattson           |  | Director                                                    |  | March 4, 2004
|                                                |  |                                                            
|/s/    L. E. SIMMONSL. E. Simmons               |  | Director                                                    |  | March 4, 2004
|                                                |  |                                                            
|/s/    JEFFERY A.
SMISEKJeffery A. Smisek       |  | Director                                                    |  | March 4, 2004
|                                                |  |                                                            
|/s/    DOUGLAS E.
SWANSONDouglas E.
Swanson     |  | Director                                                    |  | March 4, 2004



54



---

|                                      |  |          |  |              
|------------------------------------- |  | -------- |  | -------------
|Signature                             |  | Title    |  | Date         
|                                      |  |         
|/s/    EUGENE R.
WHITEEugene R. White |  | Director |  | March 4, 2004
|                                      |  |         
|/s/    JAMES D.
WOODSJames D. Woods   |  | Director |  | March 4, 2004



55



---

REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Stockholders

Varco
International, Inc.



We have audited the accompanying
consolidated balance sheets of Varco International, Inc. as of December 31, 2003 and 2002 and the related consolidated statements of income, common stockholders equity and comprehensive income, and cash flows for each of the three years
in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and schedules based on our audits.



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



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Varco International, Inc. at December 31, 2003 and 2002, and the consolidated results of its income and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects
the information set forth therein.



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



/s/    ERNST & YOUNG LLP



Houston, Texas

February 2, 2004



F-1



---

VARCO INTERNATIONAL, INC.



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                                              |  | December 31,   |          
|                                                                                                                                                                                                                              |  | 2003           |           |   | 2002 |  
|                                                                                                                                                                                                                              |  | (in thousands) |          
|ASSETS                                                                                                                                                                                                                        |  |                |          
|Current assets:                                                                                                                                                                                                               |  |                |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                                                                                                                     |  | $              | 85,748    |   |      | $ | 105,997   |  
|Accounts receivable, net                                                                                                                                                                                                      |  |                | 331,665   |   |      |   | 323,456   |  
|Inventory, net                                                                                                                                                                                                                |  |                | 339,317   |   |      |   | 279,958   |  
|Deferred tax assets                                                                                                                                                                                                           |  |                | 16,897    |   |      |   | 15,727    |  
|Prepaid expenses and other                                                                                                                                                                                                    |  |                | 23,798    |   |      |   | 22,840    |  
|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  
|Total current assets                                                                                                                                                                                                          |  |                | 797,425   |   |      |   | 747,978   |  
|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  
|Property and equipment, net                                                                                                                                                                                                   |  |                | 489,031   |   |      |   | 450,131   |  
|Identified intangibles, net                                                                                                                                                                                                   |  |                | 31,493    |   |      |   | 32,918    |  
|Goodwill, net                                                                                                                                                                                                                 |  |                | 433,916   |   |      |   | 418,659   |  
|Other assets, net                                                                                                                                                                                                             |  |                | 12,474    |   |      |   | 11,374    |  
|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  
|Total assets                                                                                                                                                                                                                  |  | $              | 1,764,339 |   |      | $ | 1,661,060 |  
|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  
|LIABILITIES AND EQUITY                                                                                                                                                                                                        |  |                |          
|Current liabilities:                                                                                                                                                                                                          |  |                |           |   |      |   |           |  
|Accounts payable                                                                                                                                                                                                              |  | $              | 98,389    |   |      | $ | 90,604    |  
|Accrued liabilities                                                                                                                                                                                                           |  |                | 125,701   |   |      |   | 111,430   |  
|Income taxes payable                                                                                                                                                                                                          |  |                | 7,842     |   |      |   | 9,252     |  
|Current portion of long-term debt and short-term borrowings                                                                                                                                                                   |  |                | 6,447     |   |      |   | 7,045     |  
|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  
|Total current liabilities                                                                                                                                                                                                     |  |                | 238,379   |   |      |   | 218,331   |  
|Long-term debt                                                                                                                                                                                                                |  |                | 450,471   |   |      |   | 460,883   |  
|Pension liabilities and post-retirement obligations                                                                                                                                                                           |  |                | 29,514    |   |      |   | 24,899    |  
|Deferred taxes payable                                                                                                                                                                                                        |  |                | 46,221    |   |      |   | 35,252    |  
|Other liabilities                                                                                                                                                                                                             |  |                | 5,512     |   |      |   | 1,413     |  
|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  
|Total liabilities                                                                                                                                                                                                             |  |                | 770,097   |   |      |   | 740,778   |  
|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  
|Commitments and contingencies (Note 11)                                                                                                                                                                                       |  |                |           |   |      |   |           |  
|Common stockholders equity:                                                                                                                                                                                                  |  |                |           |   |      |   |           |  
|Common stock, $.01 par value, 200,000,000 shares authorized,99,150,487 shares issued and 96,908,207 shares outstanding at December 31,
2003 (98,416,012 shares issued and 96,991,312 shares outstanding at December 31, 2002) |  |                | 992       |   |      |   | 984       |  
|Paid in capital                                                                                                                                                                                                               |  |                | 535,244   |   |      |   | 525,782   |  
|Retained earnings                                                                                                                                                                                                             |  |                | 494,598   |   |      |   | 427,355   |  
|Accumulated other comprehensive loss                                                                                                                                                                                          |  |                | (6,243    | ) |      |   | (18,509   | )
|Less: treasury stock at cost (2,242,280 and 1,424,700 shares at December 31, 2003 and 2002, respectively)                                                                                                                     |  |                | (30,349   | ) |      |   | (15,330   | )
|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  
|Total common stockholders equity                                                                                                                                                                                             |  |                | 994,242   |   |      |   | 920,282   |  
|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  
|Total liabilities and equity                                                                                                                                                                                                  |  | $              | 1,764,339 |   |      | $ | 1,661,060 |  
|                                                                                                                                                                                                                              |  |                |           |   |      |   |           |  



See accompanying notes.



F-2



---

VARCO INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF INCOME



|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|----------------------------------------------------- |  | ------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                      |  | Years Ended December 31,              |          
|                                                      |  | 2003                                  |           |   | 2002 |   |           | 2001 | 
|                                                      |  | (in thousands, except per share data) |          
|Revenue:                                              |  |                                       |           |   |      |   |           |      |  |   |           |  
|Sales                                                 |  | $                                     | 788,567   |   |      | $ | 810,749   |      |  | $ | 751,284   |  
|Services and rentals                                  |  |                                       | 661,040   |   |      |   | 524,315   |      |  |   | 516,525   |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|Total                                                 |  |                                       | 1,449,607 |   |      |   | 1,335,064 |      |  |   | 1,267,809 |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|Cost and expenses:                                    |  |                                       |           |   |      |   |           |      |  |   |           |  
|Cost of sales                                         |  |                                       | 467,361   |   |      |   | 499,960   |      |  |   | 488,558   |  
|Cost of services and rentals                          |  |                                       | 588,750   |   |      |   | 452,097   |      |  |   | 395,257   |  
|Amortization of goodwill                              |  |                                       |          |   |      |   |          |      |  |   | 10,457    |  
|Selling, general and administrative                   |  |                                       | 180,840   |   |      |   | 163,383   |      |  |   | 152,276   |  
|Research and engineering costs                        |  |                                       | 61,506    |   |      |   | 57,072    |      |  |   | 46,635    |  
|Merger, transaction, impairment, and litigation costs |  |                                       | 11,169    |   |      |   | 6,487     |      |  |   | 16,500    |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|Total                                                 |  |                                       | 1,309,626 |   |      |   | 1,178,999 |      |  |   | 1,109,683 |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|Operating profit                                      |  |                                       | 139,981   |   |      |   | 156,065   |      |  |   | 158,126   |  
|                                                      |  |                                       |          
|Other expense (income):                               |  |                                       |           |   |      |   |           |      |  |   |           |  
|Interest expense                                      |  |                                       | 30,168    |   |      |   | 25,608    |      |  |   | 21,776    |  
|Interest income                                       |  |                                       | (1,393    | ) |      |   | (860      | )    |  |   | (2,145    | )
|Foreign exchange loss (gain)                          |  |                                       | (1,062    | ) |      |   | 5,201     |      |  |   | (71       | )
|Other                                                 |  |                                       | 4,698     |   |      |   | 3,337     |      |  |   | 6,471     |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|Income before income taxes                            |  |                                       | 107,570   |   |      |   | 122,779   |      |  |   | 132,095   |  
|Provision for income taxes                            |  |                                       | 40,327    |   |      |   | 42,972    |      |  |   | 49,127    |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|Net income                                            |  | $                                     | 67,243    |   |      | $ | 79,807    |      |  | $ | 82,968    |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|                                                      |  |                                       |          
|Earnings per common share:                            |  |                                       |           |   |      |   |           |      |  |   |           |  
|Basic earnings per common share                       |  | $                                     | 0.69      |   |      | $ | 0.83      |      |  | $ | 0.87      |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|Dilutive earnings per common share                    |  | $                                     | 0.68      |   |      | $ | 0.82      |      |  | $ | 0.86      |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|Weighted average number of common shares outstanding: |  |                                       |           |   |      |   |           |      |  |   |           |  
|Basic                                                 |  |                                       | 97,299    |   |      |   | 96,629    |      |  |   | 95,733    |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  
|Dilutive                                              |  |                                       | 98,165    |   |      |   | 97,431    |      |  |   | 96,675    |  
|                                                      |  |                                       |           |   |      |   |           |      |  |   |           |  



See accompanying notes.



F-3



---

VARCO INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY

AND COMPREHENSIVE INCOME



|                                                     |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  
|---------------------------------------------------- |  | ----------------- | - |  | ------------------------- | --- | -------------- | - | ---------------- |  | ------------------------------------------ | ------- |  | ------------- | ------- | - | ------------------------------ | - | ------- | - |  | - | ------- | -
|                                                     |  | SharesOutstanding |   |  | CommonStock $.01Par Value |     | Paid inCapital |   | RetainedEarnings |  | AccumulatedOtherComprehensiveIncome (loss) |         |  | TreasuryStock |         |   | TotalCommonStockholdersEquity |  
|                                                     |  | (in thousands)    |  
|Balance at December 31, 2000                         |  | 94,821            |   |  | $                         | 962 |                | $ | 498,692          |  | $                                          | 264,580 |  | $             | (16,921 | ) |                                | $ | (15,330 | ) |  | $ | 731,983 |  
|                                                     |  |                   |   |  |                           |     |               
|2001 Comprehensive income:                           |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  
|Net income                                           |  |                  |   |  |                           |    |                |   |                 |  |                                            | 82,968  |  |               |        |   |                                |   |        |   |  |   | 82,968  |  
|Foreign currency translation adjustment              |  |                  |   |  |                           |    |                |   |                 |  |                                            |        |  |               | (2,094  | ) |                                |   |        |   |  |   | (2,094  | )
|                                                     |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  
|2001 Comprehensive income                            |  |                  |   |  |                           |    |                |   |                 |  |                                            | 82,968  |  |               | (2,094  | ) |                                |   |        |   |  |   | 80,874  |  
|Common stock issued                                  |  | 1,101             |   |  |                           | 11  |                |   | 10,806           |  |                                            |        |  |               |        |   |                                |   |        |   |  |   | 10,817  |  
|Common stock issued in exchange for convertible debt |  | 56                |   |  |                           | 1   |                |   | 833              |  |                                            |        |  |               |        |   |                                |   |        |   |  |   | 834     |  
|Tax benefit of options exercised                     |  |                  |   |  |                           |    |                |   | 3,806            |  |                                            | -      |  |               |        |   |                                |   |        |   |  |   | 3,806   |  
|                                                     |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  
|Balance at December 31, 2001                         |  | 95,978            |   |  |                           | 974 |                |   | 514,137          |  |                                            | 347,548 |  |               | (19,015 | ) |                                |   | (15,330 | ) |  |   | 828,314 |  
|                                                     |  |                   |   |  |                           |     |               
|2002 Comprehensive income:                           |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  
|Net income                                           |  |                  |   |  |                           |    |                |   |                 |  |                                            | 79,807  |  |               |        |   |                                |   |        |   |  |   | 79,807  |  
|Foreign currency translation adjustment              |  |                  |   |  |                           |    |                |   |                 |  |                                            |        |  |               | (840    | ) |                                |   |        |   |  |   | (840    | )
|Gain from interest rate contract                     |  |                  |   |  |                           | -  |                |   |                 |  |                                            |        |  |               | 1,346   |   |                                |   | -      |   |  |   | 1,346   |  
|                                                     |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  
|2002 Comprehensive income                            |  |                  |   |  |                           |    |                |   |                 |  |                                            | 79,807  |  |               | 506     |   |                                |   |        |   |  |   | 80,313  |  
|Common stock issued                                  |  | 1,002             |   |  |                           | 10  |                |   | 9,533            |  |                                            |        |  |               |        |   |                                |   |        |   |  |   | 9,543   |  
|Common stock issued in exchange for convertible debt |  | 11                |   |  |                           |    |                |   | 167              |  |                                            |        |  |               |        |   |                                |   | -      |   |  |   | 167     |  
|Tax benefit of options exercised                     |  |                  |   |  |                           | -  |                |   | 1,945            |  |                                            | -      |  |               |        |   |                                |   |        |   |  |   | 1,945   |  
|                                                     |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  
|Balance at December 31, 2002                         |  | 96,991            |   |  | $                         | 984 |                | $ | 525,782          |  | $                                          | 427,355 |  | $             | (18,509 | ) |                                | $ | (15,330 | ) |  | $ | 920,282 |  
|                                                     |  |                   |   |  |                           |     |               
|2003 Comprehensive income:                           |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  
|Net income                                           |  |                  |   |  |                           |    |                |   |                 |  |                                            | 67,243  |  |               |        |   |                                |   |        |   |  |   | 67,243  |  
|Foreign currency translation adjustment              |  |                  |   |  |                           |    |                |   |                 |  |                                            |        |  |               | 12,411  |   |                                |   |        |   |  |   | 12,411  |  
|Loss from interest rate contract                     |  |                  |   |  |                           |    |                |   |                 |  |                                            |        |  |               | (145    | ) |                                |   |        |   |  |   | (145    | )
|                                                     |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  
|2003 Comprehensive income                            |  |                  |   |  |                           |    |                |   |                 |  |                                            | 67,243  |  |               | 12,266  |   |                                |   |        |   |  |   | 79,509  |  
|Common stock issued                                  |  | 735               |   |  |                           | 8   |                |   | 8,371            |  |                                            |        |  |               |        |   |                                |   |        |   |  |   | 8,379   |  
|Tax benefit of options exercised                     |  |                  |   |  |                           |    |                |   | 1,091            |  |                                            |        |  |               |        |   |                                |   |        |   |  |   | 1,091   |  
|Treasury stock purchased                             |  | (818              | ) |  |                           |    |                |   |                 |  |                                            |        |  |               |        |   |                                |   | (15,019 | ) |  |   | (15,019 | )
|                                                     |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  
|Balance at December 31, 2003                         |  | 96,908            |   |  | $                         | 992 |                | $ | 535,244          |  | $                                          | 494,598 |  | $             | (6,243  | ) |                                | $ | (30,349 | ) |  | $ | 994,242 |  
|                                                     |  |                   |   |  |                           |     |                |   |                  |  |                                            |         |  |               |         |   |                                |   |         |   |  |   |         |  



See accompanying notes.



F-4



---

VARCO INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | Years Ended December 31, |         
|                                                                                  |  | 2003                     |          |   | 2002 |   |          | 2001 | 
|                                                                                  |  | (in thousands)           |         
|Cash flows from operating activities:                                             |  |                          |          |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                        | 67,243   |   |      | $ | 79,807   |      |  | $ | 82,968   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                     |  |                          | 67,199   |   |      |   | 59,246   |      |  |   | 67,900   |  
|Non-cash write-offs                                                               |  |                          | 11,169   |   |      |   |         |      |  |   | 1,986    |  
|Provision for losses on accounts receivable                                       |  |                          | 3,369    |   |      |   | 2,894    |      |  |   | 6,326    |  
|Provision for losses on inventory                                                 |  |                          | 7,405    |   |      |   | 7,702    |      |  |   | 9,507    |  
|Provision (benefit) for deferred taxes                                            |  |                          | 8,980    |   |      |   | 7,219    |      |  |   | (8,146   | )
|Other non-cash charges                                                            |  |                          | (955     | ) |      |   | (607     | )    |  |   | 408      |  
|Changes in current assets and liabilities, net of effects from acquisitions:      |  |                          |          |   |      |   |          |      |  |   |          |  
|Accounts receivable                                                               |  |                          | (10,845  | ) |      |   | 35,358   |      |  |   | (51,872  | )
|Inventory                                                                         |  |                          | (64,180  | ) |      |   | (54,032  | )    |  |   | (60,914  | )
|Prepaid expenses and other assets                                                 |  |                          | 236      |   |      |   | 3,150    |      |  |   | (9,520   | )
|Accounts payable, accrued liabilities and other                                   |  |                          | 12,608   |   |      |   | (22,984  | )    |  |   | 19,954   |  
|Income taxes payable                                                              |  |                          | (1,466   | ) |      |   | (15,970  | )    |  |   | 25,398   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                          | 100,763  |   |      |   | 101,783  |      |  |   | 83,995   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows used for investing activities:                                         |  |                          |          |   |      |   |          |      |  |   |          |  
|Capital expenditures                                                              |  |                          | (67,092  | ) |      |   | (49,377  | )    |  |   | (65,834  | )
|Business acquisitions, net of cash acquired                                       |  |                          | (38,951  | ) |      |   | (152,363 | )    |  |   | (145,953 | )
|Other                                                                             |  |                          | (548     | ) |      |   | (593     | )    |  |   | 661      |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash used for investing activities                                            |  |                          | (106,591 | ) |      |   | (202,333 | )    |  |   | (211,126 | )
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash flows provided by (used for) financing activities:                           |  |                          |          |   |      |   |          |      |  |   |          |  
|Borrowings under financing agreements, net                                        |  |                          | 2,302    |   |      |   | 239,388  |      |  |   | 302,600  |  
|Principal payments under financing agreements                                     |  |                          | (10,818  | ) |      |   | (100,168 | )    |  |   | (137,832 | )
|Debt issue costs                                                                  |  |                          |         |   |      |   | (1,732   | )    |  |   | (1,782   | )
|Proceeds from interest rate contract                                              |  |                          |         |   |      |   | 1,346    |      |  |   |         |  
|Proceeds from sale of common stock, net                                           |  |                          | 8,379    |   |      |   | 9,543    |      |  |   | 10,132   |  
|Purchase of treasury stock                                                        |  |                          | (15,019  | ) |      |   |         |      |  |   |         |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used for) financing activities                              |  |                          | (15,156  | ) |      |   | 148,377  |      |  |   | 173,118  |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Effect of exchange rate changes on cash                                           |  |                          | 735      |   |      |   | 671      |      |  |   | (664     | )
|Net increase (decrease) in cash and cash equivalents                              |  |                          | (20,249  | ) |      |   | 48,498   |      |  |   | 45,323   |  
|Cash and cash equivalents:                                                        |  |                          |          |   |      |   |          |      |  |   |          |  
|Beginning of period                                                               |  |                          | 105,997  |   |      |   | 57,499   |      |  |   | 12,176   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|End of period                                                                     |  | $                        | 85,748   |   |      | $ | 105,997  |      |  | $ | 57,499   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosure of cash information:                                      |  |                          |          |   |      |   |          |      |  |   |          |  
|Cash paid during the year for:                                                    |  |                          |          |   |      |   |          |      |  |   |          |  
|Interest                                                                          |  | $                        | 31,632   |   |      | $ | 24,826   |      |  | $ | 19,350   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  
|Taxes                                                                             |  | $                        | 32,811   |   |      | $ | 52,753   |      |  | $ | 31,740   |  
|                                                                                  |  |                          |          |   |      |   |          |      |  |   |          |  



See accompanying notes.



F-5



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    Basis of Presentation



Consolidation



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



Nature of Business and
Risk Factors



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



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



The Company operates in over 40 countries around the world. Its revenues are geographically located in North America (57%),
Latin America (10%), Europe, Africa, and the Middle East (24%), and the Far East (9%). As a result of its international presence, the Companys operations are subject to the risks normally associated with conducting businesses in foreign
countries, including foreign exchange fluctuations and uncertain political and economic environments, which may limit or disrupt markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property
without compensation. In addition, the Company has significant customer concentrations in the Middle East, Latin America and the Far East whose spending can be volatile based on oil price changes, the political environment and delays in the
government budget. Adverse changes in individual circumstances can have a significant negative impact on the financial performance of the Company.



2.    Summary of Significant Accounting Policies



Revenue Recognition



The Companys products and services are sold based upon purchase orders or contracts with the customer that include fixed or determinable prices and
that do not include right of return or other similar provisions or other significant post delivery obligations. The Company records revenue at the time its manufacturing process is complete, the customer has been provided with all proper inspection
and other required documentation, title and risk of loss has passed to the customer, collectibility is reasonably assured and the product has been delivered. Customer advances or deposits are deferred and recognized as revenue when the Company has
completed all of its performance obligations related to the sale. The Company also recognizes revenue as services are performed. The amounts billed for shipping and handling cost are included in revenue and related costs are included in costs of
sales.



F-6



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In addition, the Company enters into transactions that include multiple-element arrangements, which
may include any combination of equipment products, services, hardware, and software. When some elements are delivered prior to others in an arrangement and all of the following criteria are met, revenue for the delivered element is recognized upon
delivery of such item. Otherwise, revenue is deferred until the delivery of the last element.



| |  |  | Vendor-specific objective evidence (VSOE) of fair value of the undelivered elements.
| | - |  | --------------------------------------------------------------------------------------



| |  |  | The functionality of the delivered elements is not dependent on the undelivered elements.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Delivery of the delivered element represents the culmination of the earnings process.
| | - |  | -------------------------------------------------------------------------------------



VSOE is the price charged by the Company to an external customer for the same element when such element is sold separately.



Revenue from rig fabrication turnkey contracts is recognized on the completed
contract method. Provisions for future losses on turnkey contracts are recognized when it becomes apparent that expenses to be incurred on a specific contract will exceed the revenue from that contract.



Cash and Cash Equivalents



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



Financial
Instruments and Concentrations of Credit Risk



The
carrying amounts of financial instruments including cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximated fair value because of the relatively short maturity of these instruments. The carrying value
of debt approximated fair values as of December 31, 2003 and 2002 except for the Companys $100,000,000 7.5% Senior Notes due 2008, $200,000,000 7.25% Senior Notes due 2011, and $150,000,000 5.5% Senior Notes due 2012. Based on information
provided by a national brokerage company, the $100 million Senior Notes were valued at $107,447,000 and $111,146,000 at December 31, 2003 and 2002. The $200 million Senior Notes were valued at $227,730,000 and $211,601,000 at December 31, 2003 and
2002. The fair value of the $150,000,000 5.5% Senior Notes due 2012 were valued at $152,512,500 at December 31, 2003 and were undeterminable at December 31, 2002. The fair value of other financial instruments approximate their carrying value at
December 31, 2003 and 2002.



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



Reserve for bad debts are determined on a specific identification basis when we believe that the required payment of specific amounts owed to us is not probable. Accounts receivable are net of allowances for doubtful
accounts of approximately $11,172,000 and $11,558,000 at December 31, 2003 and 2002, respectively.



Inventory



Inventories are stated at the lower of cost or market. The Company determines the cost of inventories using the last-in, first-out (LIFO)
method for certain of its Drilling Equipment Group inventory (representing 11% of



F-7



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



total inventory). Reserves for inventory obsolescence are determined based on our historical usage of inventory on-hand as well as our future expectations
related to our substantial installed base and the development of new products. Inventory is net of our reserve of excess and obsolete inventory of approximately $31,531,000 and $28,993,000 at December 31, 2003 and 2002, respectively.



Property and equipment



Property and equipment is stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated useful lives for financial reporting purposes and generally by the accelerated or modified accelerated costs recovery systems for income tax reporting purposes. Estimated
useful lives are 30 years for buildings and 5-12 years for machinery and equipment. The cost of repairs and maintenance is charged to income as incurred. Major repairs and improvements are capitalized and depreciated over the remaining useful life
of the asset. The depreciation of fixed assets recorded under capital lease agreements is included in depreciation expense. Property and equipment depreciation expense was $62,469,000, 54,889,000, and $53,781,000 for the years ended December 31,
2003, 2002, and 2001, respectively.



Goodwill and Identified
intangibles



All business combinations initiated after
June 30, 2001 are accounted for under the purchase method of accounting. Intangible assets deemed to have indefinite lives (including goodwill) are not amortized but are subject to annual impairment tests. Accordingly, the Company did not amortize
any goodwill purchased after June 30, 2001. Other intangible assets are amortized over their useful lives.



Identified intangibles with determinable lives are being amortized on a straight-line basis, over estimated useful lives between 5 and 40 years, and are
presented net of accumulated amortization of approximately $34,136,000 and $30,202,000 at December 31, 2003 and 2002, respectively. Identified intangibles consist primarily of technology, patents, trademarks, license agreements, existing service
contracts and covenants not to compete. Amortization expense of identified intangibles for the next five years is estimated to be $10,500,000.



Goodwill represents the excess of the purchase price over the fair market value of the net assets acquired. Prior to June 30, 2001, such excess costs were
being amortized on a straight-line basis over lives ranging from 10-40 years depending on the estimated economic life. Accumulated amortization at December 31, 2003 and 2002 was approximately $55,361,000.



The effects of not amortizing goodwill and other intangible assets for the
year ended December 31, 2001 follows (in thousands except per share data):



|                                              |  |   |       
|--------------------------------------------- |  | - | ------
|Net income as reported                        |  | $ | 82,968
|Add: Amortization of goodwill                 |  |   | 10,457
|                                              |  |   |       
|Net income as adjusted                        |  | $ | 93,425
|                                              |  |   |       
|Basic earnings per common share as reported   |  | $ | 0.87  
|Add: Amortization of goodwill                 |  |   | .11   
|                                              |  |   |       
|Basic earnings per common share as adjusted   |  | $ | 0.98  
|                                              |  |   |       
|Diluted earnings per common share as reported |  | $ | 0.86  
|Add: Amortization of goodwill                 |  |   | .11   
|                                              |  |   |       
|Diluted earnings per common share as adjusted |  | $ | 0.97  
|                                              |  |   |       



F-8



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



During the fourth quarter of 2003, the Company
recognized a charge of $11,200,000 related to goodwill impairment ($10,100,000) and write off of fixed assets as a result of its decision to exit the rig fabrication business.



Impairment of Long-Lived Assets



Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. The net carrying value of assets not recoverable is reduced to fair value if lower than carrying value. In determining the fair market
value of the assets, the Company considers market trends and recent transactions involving sales of similar assets, or when not available, discounted cash flow analysis. Long- lived assets expected to be disposed of, including excess equipment and
production facilities held for sale, are stated at their estimated fair value less costs to sell.



Warranty Accruals



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



Environmental Liabilities



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



Income taxes



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



Derivative financial instruments



The Company records all derivative financial instruments at their fair value in our consolidated balance sheet. The Company holds derivative instruments
which are designated as cash flow or fair value hedges and are highly effective in offsetting movements in the underlying risks. The effective portion of the cash flow hedge is



F-9



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



deferred in other comprehensive income and reclassified to earnings over the life of the debt as the fixed rate interest obligation affect earnings. Because
the derivative financial instrument is so closely related to the underlying transaction, hedge ineffectiveness is insignificant. The fair value hedges are considered perfectly effective against changes in the fair value of debt due to changes in the
benchmark interest rate over its term.



Foreign exchange
rates



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



The assets and liabilities of certain foreign subsidiaries are translated at current exchange rates and the related
translation adjustments are recorded directly in stockholders equity. For subsidiaries where the U.S. dollar is the functional currency, certain assets are translated at historical exchange rates and all translation adjustments are reflected
in the statements of income.



Stock based compensation



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



Earnings per
common share



Basic earnings per common share is computed
by dividing net income by the weighted-average number of common shares outstanding for the period. The Companys diluted earnings per common share is calculated by adjusting net income for after-tax interest expense on convertible debt and
dividing that number by the weighted average number of common shares outstanding plus shares which would be assumed outstanding after conversion of convertible debt, vested stock options and outstanding stock warrants under the treasury stock
method. The weighted average number of outstanding stock options, which were excluded from the calculation of diluted earnings per share because their impact would have been antidilutive, aggregated 197,513, 331,904, and 342,150 in 2003, 2002, and
2001, respectively.



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



|                                                 |  |                          |        |      |   |        |  |   |       
|------------------------------------------------ |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                                                 |  | Years Ended December 31,
|                                                 |  | 2003                     |        | 2002 |   | 2001  
|Numerator:                                       |  |                          |        |      |   |        |  |   |       
|Net income                                       |  | $                        | 67,243 |      | $ | 79,807 |  | $ | 82,968
|                                                 |  |                          |        |      |   |        |  |   |       
|Denominator:                                     |  |                          |        |      |   |        |  |   |       
|Basicweighted average common shares outstanding |  |                          | 97,299 |      |   | 96,629 |  |   | 95,733
|Dilutive effect of:                              |  |                          |        |      |   |        |  |   |       
|Employee stock options                           |  |                          | 866    |      |   | 802    |  |   | 898   
|Convertible Note                                 |  |                          |       |      |   |       |  |   | 44    
|                                                 |  |                          |        |      |   |        |  |   |       
|Dilutive outstanding shares                      |  |                          | 98,165 |      |   | 97,431 |  |   | 96,675
|                                                 |  |                          |        |      |   |        |  |   |       
|Basic earnings per share                         |  | $                        | 0.69   |      | $ | 0.83   |  | $ | 0.87  
|                                                 |  |                          |        |      |   |        |  |   |       
|Dilutive earnings per share                      |  | $                        | 0.68   |      | $ | 0.82   |  | $ | 0.86  
|                                                 |  |                          |        |      |   |        |  |   |       



F-10



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Use of estimates in the preparation of financial statements



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



Reclassification



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



New Accounting Standards



In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146) which addresses financial accounting and reporting costs associated with exit or disposal activities. SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previously, a liability for an exit cost was recognized at the date of an entitys commitment to an exit plan. The provisions
of this Statement were effective for exit or disposal activities that were initiated after December 31, 2002.



In January 2003, FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) was issued. FIN 46 requires the
consolidation of each variable interest entity (VIE) in which an enterprise absorbs a majority of the entitys expected losses or receives a majority of the entitys expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. The FASB has delayed the implementation date of FIN 46 to the first interim period ending after March 15, 2004. The Company does not believe the adoption of FIN 46 will have a material effect
on the Companys financial statements.



3.    Acquisitions



Fiscal 2003



The Company completed thirteen
acquisitions and outside investments for an aggregate purchase price of $36,601,000 consisting of cash of $35,654,000 and notes and accrued payables of $947,000. The most significant acquisitions include:



| |  |  | Mud Rentals Ltd., a UK based provider of horizontal dryers.
| | - |  | -----------------------------------------------------------



| |  |  | Maersk Contractors Environmental Division, a UK based provider of thermal desorption units.
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Church Oil Tools, a Texas based provider of blowout preventers, gate valves, drilling and standpipe manifolds and related accessories.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



F-11



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition of the 2003 acquisitions (in thousands):



|                              |  |   |       
|----------------------------- |  | - | ------
|Current assets                |  | $ | 6,654 
|Property, plant and equipment |  |   | 13,539
|Intangible assets             |  |   | 1,425 
|Goodwill                      |  |   | 14,384
|Other assets                  |  |   | 2,326 
|                              |  |   |       
|Total assets acquired         |  |   | 38,328
|                              |  |   |       
|Current liabilities           |  |   | 1,136 
|Long term debt                |  |   | 638   
|                              |  |   |       
|Total liabilities             |  |   | 1,774 
|                              |  |   |       
|Net assets acquired           |  | $ | 36,554
|                              |  |   |       



The following table
summarizes goodwill additions for 2003 acquisitions by business segment (in thousands):



|                                  |  |      |       
|--------------------------------- |  | ---- | ------
|                                  |  | 2003
|Drilling EquipmentGroup           |  | $    | 2,401 
|Tubular Services                  |  |      | 3,670 
|Drilling Services                 |  |      | 7,850 
|Coiled Tubing & Wireline Products |  |      | 463   
|                                  |  |      |       
|Total goodwill                    |  | $    | 14,384
|                                  |  |      |       



Fiscal 2002



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



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



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



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



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



F-12



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                              |  |     |         |                       |   |        |  |   |        
|----------------------------- |  | --- | ------- | --------------------- | - | ------ |  | - | -------
|                              |  | ICO |         | All OtherAcquisitions |   | Total 
|Current assets                |  | $   | 23,201  |                       | $ | 2,165  |  | $ | 25,366 
|Property, plant and equipment |  |     | 46,910  |                       |   | 3,756  |  |   | 50,666 
|Intangible assets             |  |     |        |                       |   | 4,406  |  |   | 4,406  
|Goodwill                      |  |     | 86,425  |                       |   | 5,920  |  |   | 92,345 
|Other assets                  |  |     | 702     |                       |   | 2,038  |  |   | 2,740  
|                              |  |     |         |                       |   |        |  |   |        
|Total assets acquired         |  |     | 157,238 |                       |   | 18,285 |  |   | 175,523
|                              |  |     |         |                       |   |        |  |   |        
|Current liabilities           |  |     | 17,444  |                       |   | 2,393  |  |   | 19,837 
|Long term debt                |  |     | 2,926   |                       |   | 750    |  |   | 3,676  
|Other liabilities             |  |     | 628     |                       |   | 20     |  |   | 648    
|                              |  |     |         |                       |   |        |  |   |        
|Total liabilities             |  |     | 20,998  |                       |   | 3,163  |  |   | 24,161 
|                              |  |     |         |                       |   |        |  |   |        
|Net assets acquired           |  | $   | 136,240 |                       | $ | 15,122 |  | $ | 151,362
|                              |  |     |         |                       |   |        |  |   |        



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



Fiscal 2001



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



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



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



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



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



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



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



F-13



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                              |  |               |        |                       |   |         |  |   |        
|----------------------------- |  | ------------- | ------ | --------------------- | - | ------- |  | - | -------
|                              |  | QualityTubing |        | All OtherAcquisitions |   | Total  
|Current assets                |  | $             | 15,377 |                       | $ | 41,200  |  | $ | 56,577 
|Property, plant and equipment |  |               | 8,049  |                       |   | 33,494  |  |   | 41,543 
|Intangible assets             |  |               | 146    |                       |   | 7,398   |  |   | 7,544  
|Goodwill                      |  |               | 40,639 |                       |   | 57,228  |  |   | 97,867 
|                              |  |               |        |                       |   |         |  |   |        
|Total assets acquired         |  |               | 64,211 |                       |   | 139,320 |  |   | 203,531
|                              |  |               |        |                       |   |         |  |   |        
|Current liabilities           |  |               | 7,291  |                       |   | 32,948  |  |   | 40,239 
|Long term debt                |  |               | 1,107  |                       |   | 10,711  |  |   | 11,818 
|Other liabilities             |  |               | 793    |                       |   | 2,680   |  |   | 3,473  
|                              |  |               |        |                       |   |         |  |   |        
|Total liabilities             |  |               | 9,191  |                       |   | 46,339  |  |   | 55,530 
|                              |  |               |        |                       |   |         |  |   |        
|Net assets acquired           |  | $             | 55,020 |                       | $ | 92,981  |  | $ | 148,001
|                              |  |               |        |                       |   |         |  |   |        



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



|                                  |  |      |       
|--------------------------------- |  | ---- | ------
|                                  |  | 2001
|Drilling EquipmentGroup           |  | $    | 10,118
|Tubular Services                  |  |      | 651   
|Drilling Services                 |  |      | 11,923
|Coiled Tubing & Wireline Products |  |      | 75,175
|                                  |  |      |       
|Total goodwill                    |  | $    | 97,867
|                                  |  |      |       



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



|                                                         |  |      |         |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                         |  | 2003 |         |   | 2002 |   |          | 2001 | 
|Fair value of assets acquired                            |  | $    | 40,725  |   |      | $ | 176,343  |      |  | $ | 201,483  |  
|Cash paid                                                |  |      | (38,951 | ) |      |   | (152,363 | )    |  |   | (145,953 | )
|                                                         |  |      |         |   |      |   |          |      |  |   |          |  
|Liabilities assumed and debt issued                      |  | $    | 1,774   |   |      | $ | 23,980   |      |  | $ | 55,530   |  
|                                                         |  |      |         |   |      |   |          |      |  |   |          |  
|Excess purchase price over fair value of assets acquired |  | $    | 14,384  |   |      | $ | 92,345   |      |  | $ | 97,867   |  
|                                                         |  |      |         |   |      |   |          |      |  |   |          |  



Other



Cash paid in 2003, 2002, and 2001 includes $3,297,000,
$2,388,000 and $536,000 for 2002, 2001, and 2000 acquisitions, respectively. In addition, there were $8,411,000 of accruals added to goodwill in 2003 related to the 2002 ICO acquisition.



F-14



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 2002. The pro forma information includes certain adjustments which give effect to 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 2002.



|                                   |  |      |           |      |   |          
|---------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                   |  | 2003 |           | 2002
|Revenue                            |  | $    | 1,465,481 |      | $ | 1,441,647
|                                   |  |      |           |      |   |          
|Net income                         |  | $    | 70,124    |      | $ | 84,736   
|                                   |  |      |           |      |   |          
|Dilutive earnings per common share |  | $    | 0.71      |      | $ | 0.87     
|                                   |  |      |           |      |   |          



4.    Inventory



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



|                                           |  |      |         |   |      |   |         |  
|------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                           |  | 2003 |         |   | 2002 |  
|Raw materials                              |  | $    | 84,206  |   |      | $ | 83,660  |  
|Work in progress                           |  |      | 104,357 |   |      |   | 65,192  |  
|Finished goods                             |  |      | 191,717 |   |      |   | 170,640 |  
|Inventory reserves including LIFO reserves |  |      | (40,963 | ) |      |   | (39,534 | )
|                                           |  |      |         |   |      |   |         |  
|                                           |  | $    | 339,317 |   |      | $ | 279,958 |  
|                                           |  |      |         |   |      |   |         |  



5.    Property,
plant and equipment



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



|                              |  |      |          |   |      |   |          |  
|----------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                              |  | 2003 |          |   | 2002 |  
|Land and buildings            |  | $    | 197,416  |   |      | $ | 172,196  |  
|Operating equipment           |  |      | 424,021  |   |      |   | 379,295  |  
|Rental equipment              |  |      | 263,626  |   |      |   | 230,890  |  
|                              |  |      |          |   |      |   |          |  
|                              |  |      | 885,063  |   |      |   | 782,381  |  
|Less accumulated depreciation |  |      | (396,032 | ) |      |   | (332,250 | )
|                              |  |      |          |   |      |   |          |  
|                              |  | $    | 489,031  |   |      | $ | 450,131  |  
|                              |  |      |          |   |      |   |          |  



6.    Accrued
Liabilities



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



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|                   |  | 2003 |         | 2002
|Compensation       |  | $    | 40,402  |      | $ | 38,249 
|Warranty           |  |      | 9,045   |      |   | 9,368  
|Interest           |  |      | 5,932   |      |   | 6,439  
|Taxes (non income) |  |      | 7,159   |      |   | 7,387  
|Insurance          |  |      | 15,248  |      |   | 11,989 
|Other              |  |      | 47,915  |      |   | 37,998 
|                   |  |      |         |      |   |        
|                   |  | $    | 125,701 |      | $ | 111,430
|                   |  |      |         |      |   |        



F-15



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



7.    Income Taxes



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



|        |  |      |         |      |   |         |  |   |        
|------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|        |  | 2003 |         | 2002 |   | 2001   
|U.S.    |  | $    | 86,036  |      | $ | 62,373  |  | $ | 59,866 
|Foreign |  |      | 21,534  |      |   | 60,406  |  |   | 72,229 
|        |  |      |         |      |   |         |  |   |        
|        |  | $    | 107,570 |      | $ | 122,779 |  | $ | 132,095
|        |  |      |         |      |   |         |  |   |        



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



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



|                                   |  |      |        |   |      |   |        |  |   |        |  
|---------------------------------- |  | ---- | ------ | - | ---- | - | ------ |  | - | ------ | -
|                                   |  | 2003 |        |   | 2002 |   | 2001   | 
|Current provision:                 |  |      |        |   |      |   |        |  |   |        |  
|U.S.                               |  | $    | 14,782 |   |      | $ | 17,609 |  | $ | 27,809 |  
|Foreign                            |  |      | 16,565 |   |      |   | 18,144 |  |   | 29,464 |  
|                                   |  |      |        |   |      |   |        |  |   |        |  
|Total current provision            |  |      | 31,347 |   |      |   | 35,753 |  |   | 57,273 |  
|                                   |  |      |        |   |      |   |        |  |   |        |  
|Deferred provision (benefit):      |  |      |        |   |      |   |        |  |   |        |  
|U.S.                               |  |      | 11,009 |   |      |   | 3,012  |  |   | (3,162 | )
|Foreign                            |  |      | (2,029 | ) |      |   | 4,207  |  |   | (4,984 | )
|                                   |  |      |        |   |      |   |        |  |   |        |  
|Total deferred provision (benefit) |  |      | 8,980  |   |      |   | 7,219  |  |   | (8,146 | )
|                                   |  |      |        |   |      |   |        |  |   |        |  
|Total provision                    |  | $    | 40,327 |   |      | $ | 42,972 |  | $ | 49,127 |  
|                                   |  |      |        |   |      |   |        |  |   |        |  



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



|                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                             |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Tax expense at federal statutory rate                        |  | $    | 37,650 |   |      | $ | 42,972 |      |  | $ | 46,232 |  
|Incremental effect of foreign operations                     |  |      | 4,989  |   |      |   | 2,991  |      |  |   | 4,446  |  
|Nondeductible goodwill amortization and merger related costs |  |      |       |   |      |   |       |      |  |   | 1,621  |  
|FSC/ETI benefit                                              |  |      | (2,749 | ) |      |   | (3,705 | )    |  |   | (3,490 | )
|Other, net                                                   |  |      | 437    |   |      |   | 714    |      |  |   | 318    |  
|                                                             |  |      |        |   |      |   |        |      |  |   |        |  
|                                                             |  | $    | 40,327 |   |      | $ | 42,972 |      |  | $ | 49,127 |  
|                                                             |  |      |        |   |      |   |        |      |  |   |        |  



F-16



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                       |  |      |        |   |      |   |        |  
|------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                                       |  | 2003 |        |   | 2002 |  
|Gross deferred tax assets:                             |  |      |        |   |      |   |        |  
|Receivables                                            |  | $    | 2,221  |   |      | $ | 2,547  |  
|Foreign net operating losses                           |  |      | 2,139  |   |      |   | 2,228  |  
|Accrued liabilities and other reserves                 |  |      | 1,439  |   |      |   | 3,613  |  
|Inventory reserves and intercompany profit elimination |  |      | 13,079 |   |      |   | 14,524 |  
|Post retirement benefit obligation                     |  |      | 2,698  |   |      |   | 2,428  |  
|                                                       |  |      |        |   |      |   |        |  
|Subtotal gross deferred tax assets                     |  |      | 21,576 |   |      |   | 25,340 |  
|Valuation allowance                                    |  |      | (2,477 | ) |      |   | (1,975 | )
|                                                       |  |      |        |   |      |   |        |  
|Net deferred tax assets                                |  |      | 19,099 |   |      |   | 23,365 |  
|                                                       |  |      |        |   |      |   |        |  
|Gross deferred tax liabilities:                        |  |      |        |   |      |   |        |  
|Property and equipment                                 |  |      | 38,078 |   |      |   | 35,339 |  
|Intangible assets                                      |  |      | 3,845  |   |      |   | 1,051  |  
|Reserve for unremitted foreign earnings                |  |      | 6,500  |   |      |   | 6,500  |  
|                                                       |  |      |        |   |      |   |        |  
|Gross deferred tax liabilities                         |  |      | 48,423 |   |      |   | 42,890 |  
|                                                       |  |      |        |   |      |   |        |  
|Total net deferred tax liability                       |  | $    | 29,324 |   |      | $ | 19,525 |  
|                                                       |  |      |        |   |      |   |        |  



The total net deferred
tax liability at December 31, 2003 is comprised of $16,897,000 of net current tax assets and $46,221,000 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 $86,705,000 at December 31, 2003. If such earnings were repatriated, foreign withholding taxes of approximately $2,827,000 would result. The Company has made provision for additional taxes on the anticipated repatriation of
certain earnings from its foreign subsidiaries. Undistributed earnings of its foreign subsidiaries in excess of the amount already provided are considered permanently reinvested. It is not practical to determine the amount of federal income taxes,
if any, that might become due in the event that the balance of such earnings were to be distributed.



At December 31, 2003 the Company has approximately $7,694,000 of foreign net operating loss carryforwards, the majority of which have a three year life.
The Company has a valuation allowance of $2,749,000 against these net operating losses as the Company believes that the corresponding deferred tax asset may not be fully realizable.



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



F-17



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



8.    Long-term Debt



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



|                                                                                                 |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|                                                                                                 |  | 2003 |         | 2002
|$200,000 Senior Notes, interest at 7.25% payable semiannually, principal due on May 1, 2011      |  | $    | 201,198 |      | $ | 201,361
|$100,000 Senior Notes, interest at 7.5% payable semiannually, principal due on February 15, 2008 |  |      | 95,299  |      |   | 99,263 
|$150,000 Senior Notes, interest at 5.5% payable semiannually, principal due on November 19, 2012 |  |      | 149,294 |      |   | 149,215
|Other                                                                                            |  |      | 11,127  |      |   | 18,089 
|                                                                                                 |  |      |         |      |   |        
|Total debt                                                                                       |  |      | 456,918 |      |   | 467,928
|Less: Current maturities                                                                         |  |      | 6,447   |      |   | 7,045  
|                                                                                                 |  |      |         |      |   |        
|Long-term debt                                                                                   |  | $    | 450,471 |      | $ | 460,883
|                                                                                                 |  |      |         |      |   |        



Principal payments of
long-term debt for years subsequent to 2004 are as follows (in thousands):



|           |  |   |        
|---------- |  | - | -------
|2005       |  | $ | 2,493  
|2006       |  |   | 2,187  
|2007       |  |   | 0      
|2008       |  |   | 95,299 
|Thereafter |  |   | 350,492
|           |  |   |        
|           |  | $ | 450,471
|           |  |   |        



Senior Notes



Each of the Senior Notes are fully and unconditionally
guaranteed, on a joint and several basis, by certain wholly-owned subsidiaries of the Company (collectively Guarantor Subsidiaries and individually Guarantor). Each of the guarantees is an unsecured obligation of the
Guarantor and ranks pari passuwith the guarantees provided by and the obligations of such Guarantor Subsidiaries under the credit agreement and with all existing and future unsecured indebtedness of such Guarantor for borrowed money that is
not, by its terms, expressly subordinated in right of payment to such guarantee.



Revolver Facility



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



Other



Other debt includes $6,567,276 in promissory notes due to former owners of businesses acquired who remain employed by the Company.



At December 31, 2003, the Company had outstanding letters of credit of
$30,363,715.



F-18



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



9.    Retirement and Other Benefit Plans



During the periods reported, substantially all the Companys U.S.
employees were covered by defined contribution retirement plans. The Company also has a deferred compensation plan for its highly compensated employees to permit retirement contributions in excess of the statutory limits. Employees may voluntarily
contribute up to 25% of compensation, as defined, to these plans. The participants contributions were matched by the Company up to a maximum of 4% of compensation. Under these plans, Company cash contributions were approximately $6,010,390,
$5,094,086, and $5,014,378, in 2003, 2002, and 2001, respectively.



The Company has three major unfunded post-retirement benefit plans. These plans include the Supplemental Executive Retirement Plan (SERP), the Retiree Medical Plan, and the German Pension Plans. The following is information
regarding each plan:



Supplemental Executive Retirement Plan



For certain executives, the Company has a supplemental
defined benefits plan providing retirement and death benefits. All participants become fully vested with full service credit upon a change in control or become fully vested with 10 years of service. In 2001, the plan was amended to include current
executive officers of the Company. The discount rate for this plan was 6.5% at December 31, 2003 and 2002.



Net periodic post-retirement benefit costs related to the SERP includes the following components (in thousands):



|                                    |  |      |       |      |   |      |  |   |    
|----------------------------------- |  | ---- | ----- | ---- | - | ---- |  | - | ---
|                                    |  | 2003 |       | 2002 |   | 2001
|Service costs                       |  | $    | 337   |      | $ | 192  |  | $ |   
|Interest costs                      |  |      | 500   |      |   | 574  |  |   | 430
|Amortization of prior service costs |  |      | 183   |      |   | 183  |  |   |   
|                                    |  |      |       |      |   |      |  |   |    
|                                    |  | $    | 1,020 |      | $ | 949  |  | $ | 430
|                                    |  |      |       |      |   |      |  |   |    



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



|                                           |  |      |        |   |      |   |        |  
|------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                           |  | 2003 |        |   | 2002 |  
|Benefit obligation at beginning of year    |  | $    | 9,803  |   |      | $ | 8,598  |  
|Service costs                              |  |      | 337    |   |      |   | 192    |  
|Interest costs                             |  |      | 500    |   |      |   | 574    |  
|Actuarial loss (gains)                     |  |      | (1,006 | ) |      |   | 636    |  
|Benefit paid                               |  |      | (274   | ) |      |   | (197   | )
|                                           |  |      |        |   |      |   |        |  
|Benefits obligation at end of year         |  | $    | 9,360  |   |      | $ | 9,803  |  
|                                           |  |      |        |   |      |   |        |  
|Funded status                              |  | $    | 9,360  |   |      | $ | 9,803  |  
|Unrecognized acturial loss                 |  |      | 307    |   |      |   | (699   | )
|Unrecognized prior service cost            |  |      | (1,957 | ) |      |   | (2,140 | )
|                                           |  |      |        |   |      |   |        |  
|Accrued post-retirement benefit obligation |  | $    | 7,710  |   |      | $ | 6,964  |  
|                                           |  |      |        |   |      |   |        |  



Retiree Medical
Plan



For certain former employees who retired prior to
December 31, 1993, healthcare and life insurance benefits are provided through insurance companies. In 2001, the plan was amended to cover current executive officers of the Company upon their retirement. The assumed weighted-average annual rate of
increase in the per capita cost



F-19



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



of covered benefits is 10.0% for 2003 and is assumed to decrease gradually to 5.0% for 2008 and remain at that level thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December
31, 2003, by $670,721 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 2003 by $45,000. The weighted-average discount rate used in determining the accumulated postretirement benefit
obligation was 6.75% at December 31, 2003 and 2002.



Net
periodic postretirement benefit cost related to the retiree medical plan includes the following components (in thousands):



|                                      |  |      |       |   |      |   |       |      |  |   |      |  
|------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ---- | -
|                                      |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Interest cost                         |  | $    | 801   |   |      | $ | 763   |      |  | $ | 701  |  
|Amortization of transition obligation |  |      | 763   |   |      |   | 763   |      |  |   | 763  |  
|Amortization of gain                  |  |      | (261  | ) |      |   | (363  | )    |  |   | (485 | )
|                                      |  |      |       |   |      |   |       |      |  |   |      |  
|                                      |  | $    | 1,303 |   |      | $ | 1,163 |      |  | $ | 979  |  
|                                      |  |      |       |   |      |   |       |      |  |   |      |  



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



|                                          |  |      |        |   |      |   |        |  
|----------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                          |  | 2003 |        |   | 2002 |  
|Benefit obligation at beginning of year   |  | $    | 11,877 |   |      | $ | 11,011 |  
|Interest cost                             |  |      | 801    |   |      |   | 763    |  
|Benefits paid                             |  |      | (1,024 | ) |      |   | (429   | )
|Actuarial loss (gain)                     |  |      | (3,098 | ) |      |   | 532    |  
|                                          |  |      |        |   |      |   |        |  
|Benefit obligation at end of year         |  | $    | 8,556  |   |      | $ | 11,877 |  
|                                          |  |      |        |   |      |   |        |  
|Funded status                             |  | $    | 8,556  |   |      | $ | 11,877 |  
|Unrecognized actuarial loss               |  |      | 6,505  |   |      |   | 3,668  |  
|Unrecognized transition obligation        |  |      | (6,854 | ) |      |   | (7,617 | )
|                                          |  |      |        |   |      |   |        |  
|Accrued postretirement benefit obligation |  | $    | 8,207  |   |      | $ | 7,928  |  
|                                          |  |      |        |   |      |   |        |  



In December 2003,
President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. The Company expects that this
legislation will eventually reduce some of the costs for the Companys Retiree Medical Plan. The Company is awaiting guidance from various governmental and regulatory agencies concerning the requirements that must be met to obtain these cost
reductions, as well as the manner in which such savings should be measured. Because of various uncertainties related to the Companys response to this legislation and the appropriate accounting methodology for this event, the Company has
elected to defer financial recognition of this legislation until the FASB issues final accounting guidance. When issued, that final guidance could require the Company to change previously reported information. This deferral is permitted under FASB
Staff Position No. FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.



F-20



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



German Pension Plans



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



|                 |  |      |       |      |   |      |      |  |   |      |  
|---------------- |  | ---- | ----- | ---- | - | ---- | ---- |  | - | ---- | -
|                 |  | 2003 |       | 2002 |   |      | 2001 | 
|Service cost     |  | $    | 343   |      | $ | 263  |      |  | $ | 204  |  
|Interest cost    |  |      | 912   |      |   | 689  |      |  |   | 567  |  
|Net amortization |  |      | 41    |      |   | (162 | )    |  |   | (350 | )
|                 |  |      |       |      |   |      |      |  |   |      |  
|Pension expense  |  | $    | 1,296 |      | $ | 790  |      |  | $ | 421  |  
|                 |  |      |       |      |   |      |      |  |   |      |  



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



|                                                    |  |      |        |   |      |   |        |  
|--------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                    |  | 2003 |        |   | 2002 |  
|Projected benefit obligation at beginning of year   |  | $    | 10,199 |   |      | $ | 8,105  |  
|Service cost                                        |  |      | 343    |   |      |   | 263    |  
|Interest cost                                       |  |      | 912    |   |      |   | 689    |  
|Benefits paid                                       |  |      | (362   | ) |      |   | (257   | )
|Change in discount rates                            |  |      |       |   |      |   | 411    |  
|Exchange rate change                                |  |      | 2,423  |   |      |   | 988    |  
|                                                    |  |      |        |   |      |   |        |  
|Projected benefit obligation at the end of the year |  |      | 13,515 |   |      |   | 10,199 |  
|Unrecognized net loss                               |  |      | (329   | ) |      |   | (370   | )
|                                                    |  |      |        |   |      |   |        |  
|Accrued post-retirement benefit obligation          |  | $    | 13,186 |   |      | $ | 9,829  |  
|                                                    |  |      |        |   |      |   |        |  



The rate of increase
in future compensation levels used in determining the projected benefit obligations was 2% for December 31, 2003 and 2002. The discount rate was 6.75% at December 31, 2003 and 2002.



Future Cash Payments



Future cash payments related to the plans disclosed above are expected to be as follows (in thousands):



|                  |  |                                        |       |                      |   |                      |  |   |      
|----------------- |  | -------------------------------------- | ----- | -------------------- | - | -------------------- |  | - | -----
|                  |  | Supplemental Executive Retirement Plan |       | Retiree Medical Plan |   | German Pension Plans
|2004              |  | $                                      | 280   |                      | $ | 688                  |  | $ | 304  
|2005              |  |                                        | 576   |                      |   | 693                  |  |   | 331  
|2006              |  |                                        | 604   |                      |   | 690                  |  |   | 344  
|2007              |  |                                        | 626   |                      |   | 679                  |  |   | 374  
|2008              |  |                                        | 886   |                      |   | 672                  |  |   | 409  
|2009 through 2013 |  | $                                      | 5,788 |                      | $ | 2,277                |  | $ | 2,960



Contributions to these
plans in 2004 are expected to equal the expected cash payments.



F-21



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



10.    Common Stockholders Equity



In 2003, the Companys Board of Directors and stockholders approved
amendments to the Amended and Restated 1996 Equity Participation Plan, now known as the 2003 Equity Participation Plan. The amendments included an increase in the number of authorized shares of common stock to be granted to officers, key employees
of the Company, and non-employee members of the Board of Directors from 7,650,000 to 12,150,000 shares. Options granted under the plan to key employees are generally exercisable in installments over three years starting one year from the date
of grant and expire ten years from the date of grant. Options granted under the plan to non-employee members of the Board of Directors are exercisable in installments over four year periods starting one year from the date of grant and expire ten
years from the date of grant.



Options outstanding under plans
the Company assumed in connection with acquisitions will maintain the terms under which the options were granted. These terms allow options granted to key employees and non-employee directors to be vested in installments from one to five years
starting one year from the date of grant and expire ten years from the date of grant.



The following summarizes options activity:



|                                         |  |                          |           |   |      |   |           |      |  |   |           |  
|---------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                         |  | Years Ended December 31, |          
|                                         |  | 2003                     |           |   | 2002 |   |           | 2001 | 
|Shares under option at beginning of year |  |                          | 5,508,002 |   |      |   | 4,733,869 |      |  |   | 4,520,618 |  
|Granted                                  |  |                          | 1,649,650 |   |      |   | 1,722,355 |      |  |   | 1,176,241 |  
|Cancelled                                |  |                          | (112,093  | ) |      |   | (268,072  | )    |  |   | (125,958  | )
|Exercised                                |  |                          | (445,487  | ) |      |   | (680,150  | )    |  |   | (837,032  | )
|                                         |  |                          |           |   |      |   |           |      |  |   |           |  
|Shares under option at end of year       |  |                          | 6,600,072 |   |      |   | 5,508,002 |      |  |   | 4,733,869 |  
|                                         |  |                          |           |   |      |   |           |      |  |   |           |  
|Average price of outstanding options     |  | $                        | 15.69     |   |      | $ | 14.86     |      |  | $ | 14.47     |  
|                                         |  |                          |           |   |      |   |           |      |  |   |           |  
|Exercisable at end of year               |  |                          | 3,451,177 |   |      |   | 2,844,726 |      |  |   | 2,766,843 |  
|                                         |  |                          |           |   |      |   |           |      |  |   |           |  



The following
summarizes information about stock options outstanding as of December 31, 2003:



|                        |  |                                        |        |                     |                             |                     |        |  |                             |  |   |      
|----------------------- |  | -------------------------------------- | ------ | ------------------- | --------------------------- | ------------------- | ------ |  | --------------------------- |  | - | -----
|                        |  | Weighted-Avg.RemainingContractual Life |        | Options Outstanding |                             | Options Exercisable
|Range of Exercise Price |  |                                        | Shares |                     | Weighted-Avg.Exercise Price |                     | Shares |  | Weighted-Avg.Exercise Price
|$4.48 to $16.78         |  | 6.13                                   |        | 3,305,079           |                             | $                   | 12.24  |  | 2,140,576                   |  | $ | 11.27
|$17.50 to $32.55        |  | 7.47                                   |        | 3,294,993           |                             |                     | 19.15  |  | 1,310,601                   |  |   | 21.47
|                        |  |                                        |        |                     |                             |                     |        |  |                             |  |   |      
|Totals                  |  | 6.80                                   |        | 6,600,072           |                             | $                   | 15.69  |  | 3,451,177                   |  | $ | 15.15
|                        |  |                                        |        |                     |                             |                     |        |  |                             |  |   |      



F-22



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company accounts for its stock-based employee compensation plans using the intrinsic value
method. If the Company had accounted for its stock-based employee compensation plans using the alternative fair value method, the Companys pro forma net income and earnings per common share would have been as follows (in thousands, except
per share data):



|                                                                   |  |                          |        |      |   |        |  |   |       
|------------------------------------------------------------------ |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                                                                   |  | Years Ended December 31,
|                                                                   |  | 2003                     |        | 2002 |   | 2001  
|Proforma net income and earnings per common share                  |  |                          |        |      |   |        |  |   |       
|Net income, as reported                                            |  | $                        | 67,243 |      | $ | 79,807 |  | $ | 82,968
|Stock-based employee compensation cost, net of related tax effects |  |                          | 9,751  |      |   | 7,656  |  |   | 6,265 
|                                                                   |  |                          |        |      |   |        |  |   |       
|Proforma net income                                                |  | $                        | 57,492 |      | $ | 72,151 |  | $ | 76,703
|                                                                   |  |                          |        |      |   |        |  |   |       
|Earnings per common share:                                         |  |                          |        |      |   |        |  |   |       
|Basic earnings per common share, as reported                       |  | $                        | 0.69   |      | $ | 0.83   |  | $ | 0.87  
|Basic earnings per common share, pro forma                         |  | $                        | 0.59   |      | $ | 0.75   |  | $ | 0.80  
|Dilutive earnings per common share, as reported                    |  | $                        | 0.68   |      | $ | 0.82   |  | $ | 0.86  
|Dilutive earnings per common share, pro forma                      |  | $                        | 0.59   |      | $ | 0.74   |  | $ | 0.79  
|Weighted average number of common shares outstanding:              |  |                          |        |      |   |        |  |   |       
|Basic                                                              |  |                          | 97,299 |      |   | 96,629 |  |   | 95,733
|Dilutive                                                           |  |                          | 98,165 |      |   | 97,431 |  |   | 96,675



For options granted
during 2003, 2002, and 2001, the weighted-average fair value at date of grant was $10.66, $8.48, and $13.37 per option, respectively.



The fair value of each option grant was estimated on the date of grant using a Black Scholes option pricing model with the following assumptions for 2003,
2002, and 2001, respectively; risk free interest rates of 4.26%, 3.82%, and 5.5%; expected lives of contracts of 3 to 10 years; and volatility of 54.5%, 51.0%, and 52.6%.



The Employee Stock Purchase Plan permits eligible employees to purchase common stock at a price equal to 85% of its fair
market value at the lesser of the beginning or end of a six-month plan period. During the fiscal year ended December 31, 2003, the Company sold 286,930 shares under this plan.



In September 2003, the Board of Directors authorized a Stock Repurchase program to purchase $150,000,000 of the
Companys common stock, at managements discretion. Under this program, the Company repurchased 817,580 shares at a cost of $15,019,000 during 2003.



Stockholder Rights Plan



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



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



F-23



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



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



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



11.    Commitments and Contingencies



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



The Company leases certain facilities and equipment under operating leases
that expire at various dates through 2082. These leases generally contain renewal options and require the lessee to pay maintenance, insurance, taxes and other operating expenses in addition to the minimum annual rentals. Rental expense related to
operating leases approximated $36,817,000, $33,305,000, and $31,210,000 in 2003, 2002, and 2001, respectively.



Future minimum lease commitments under noncancellable operating leases with initial or remaining terms of one year or more at December 31, 2003 are
payable as follows (in thousands):



|                               |  |   |       
|------------------------------ |  | - | ------
|2004                           |  | $ | 23,504
|2005                           |  |   | 17,714
|2006                           |  |   | 12,132
|2007                           |  |   | 7,988 
|2008                           |  |   | 6,066 
|Thereafter                     |  |   | 23,756
|                               |  |   |       
|Total future lease commitments |  | $ | 91,160
|                               |  |   |       



The Company has
outstanding non-cancelable purchase order commitments of approximately $6,300,000 related to special order raw materials due in 2004. Purchase order commitments subsequent to 2004 are less than $500,000 on an annual basis.



F-24



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



12.    Business Segments And Foreign Operations



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



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



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



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



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



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



Summarized information for the Companys reportable segments is contained in the following table. Other Unallocated includes corporate related
expenses and certain goodwill and identified intangible amortization not allocated to product lines. Operating profit excludes impairment costs of $11,169,000 (2003) associated with the Companys rig fabrication business, transaction costs of
$3,658,000 (2002) associated with the acquisition of substantially all of the oilfield services business of ICO and $2,829,000 (2002) associated with the early termination of certain employment contracts in conjunction with the 2000 Merger, and
litigation costs of $16,500,000 (2001).



F-25



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                              |  |                    |         |                  |   |                   |  |                                   |         |                   |   |         |       |   |         |   |  |   |          
|----------------------------- |  | ------------------ | ------- | ---------------- | - | ----------------- |  | --------------------------------- | ------- | ----------------- | - | ------- | ----- | - | ------- | - |  | - | ---------
|                              |  | Drilling Equipment |         | Tubular Services |   | Drilling Services |  | Coiled Tubing & Wireline Products |         | Other Unallocated |   |         | Total
|                              |  | (in thousands)    
|2003                          |  |                    |         |                  |   |                   |  |                                   |         |                   |   |         |       |   |         |   |  |   |          
|Revenue                       |  | $                  | 474,173 |                  | $ | 455,898           |  | $                                 | 292,663 |                   | $ | 226,873 |       | $ |        |   |  | $ | 1,449,607
|Operating profit              |  |                    | 37,792  |                  |   | 69,335            |  |                                   | 54,483  |                   |   | 43,269  |       |   | (53,729 | ) |  |   | 151,150  
|Total assets                  |  |                    | 421,354 |                  |   | 605,368           |  |                                   | 406,733 |                   |   | 253,161 |       |   | 77,723  |   |  |   | 1,764,339
|Goodwill                      |  |                    | 8,194   |                  |   | 209,218           |  |                                   | 104,104 |                   |   | 112,400 |       |   |        |   |  |   | 433,916  
|Capital expenditures          |  |                    | 15,237  |                  |   | 16,257            |  |                                   | 23,674  |                   |   | 3,475   |       |   | 8,449   |   |  |   | 67,092   
|Depreciation and amortization |  |                    | 14,565  |                  |   | 20,521            |  |                                   | 24,024  |                   |   | 4,435   |       |   | 3,654   |   |  |   | 67,199   
|                              |  |                    |         |                  |   |                  
|2002                          |  |                    |         |                  |   |                   |  |                                   |         |                   |   |         |       |   |         |   |  |   |          
|Revenue                       |  | $                  | 486,695 |                  | $ | 355,966           |  | $                                 | 278,617 |                   | $ | 213,786 |       | $ |        |   |  | $ | 1,335,064
|Operating profit              |  |                    | 71,630  |                  |   | 54,405            |  |                                   | 50,476  |                   |   | 39,455  |       |   | (53,414 | ) |  |   | 162,552  
|Total assets                  |  |                    | 388,414 |                  |   | 559,284           |  |                                   | 380,141 |                   |   | 245,411 |       |   | 87,810  |   |  |   | 1,661,060
|Goodwill                      |  |                    | 15,911  |                  |   | 194,011           |  |                                   | 96,800  |                   |   | 111,937 |       |   |        |   |  |   | 418,659  
|Capital expenditures          |  |                    | 15,313  |                  |   | 11,717            |  |                                   | 17,987  |                   |   | 2,265   |       |   | 2,095   |   |  |   | 49,377   
|Depreciation and amortization |  |                    | 13,539  |                  |   | 16,807            |  |                                   | 21,028  |                   |   | 4,277   |       |   | 3,595   |   |  |   | 59,246   
|                              |  |                    |         |                  |   |                  
|2001                          |  |                    |         |                  |   |                   |  |                                   |         |                   |   |         |       |   |         |   |  |   |          
|Revenue                       |  | $                  | 395,550 |                  | $ | 352,624           |  | $                                 | 314,272 |                   | $ | 205,363 |       | $ |        |   |  | $ | 1,267,809
|Operating profit              |  |                    | 39,162  |                  |   | 67,740            |  |                                   | 70,502  |                   |   | 44,902  |       |   | (47,680 | ) |  |   | 174,626  
|Total assets                  |  |                    | 324,741 |                  |   | 404,653           |  |                                   | 403,984 |                   |   | 253,246 |       |   | 42,486  |   |  |   | 1,429,110
|Goodwill                      |  |                    | 15,911  |                  |   | 103,140           |  |                                   | 94,903  |                   |   | 111,171 |       |   |        |   |  |   | 325,125  
|Capital expenditures          |  |                    | 13,992  |                  |   | 12,645            |  |                                   | 34,248  |                   |   | 3,408   |       |   | 1,541   |   |  |   | 65,834   
|Depreciation and amortization |  |                    | 16,168  |                  |   | 15,783            |  |                                   | 21,791  |                   |   | 4,623   |       |   | 9,535   |   |  |   | 67,900   



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



|               |  |                |           |      |   |           |  |   |          
|-------------- |  | -------------- | --------- | ---- | - | --------- |  | - | ---------
|               |  | 2003           |           | 2002 |   | 2001     
|               |  | (in thousands)
|U.S.           |  | $              | 689,070   |      | $ | 579,400   |  | $ | 527,060  
|Canada         |  |                | 131,427   |      |   | 90,255    |  |   | 102,817  
|Latin America  |  |                | 141,033   |      |   | 135,173   |  |   | 167,253  
|United Kingdom |  |                | 70,310    |      |   | 90,229    |  |   | 86,163   
|Other Europe   |  |                | 145,328   |      |   | 135,796   |  |   | 153,916  
|Far East       |  |                | 129,118   |      |   | 142,618   |  |   | 100,274  
|Other          |  |                | 143,321   |      |   | 161,593   |  |   | 130,326  
|               |  |                |           |      |   |           |  |   |          
|Total          |  | $              | 1,449,607 |      | $ | 1,335,064 |  | $ | 1,267,809
|               |  |                |           |      |   |           |  |   |          



F-26



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|               |  |                |         |      |   |         |  |   |        
|-------------- |  | -------------- | ------- | ---- | - | ------- |  | - | -------
|               |  | 2003           |         | 2002 |   | 2001   
|               |  | (in thousands)
|U.S.           |  | $              | 276,566 |      | $ | 264,236 |  | $ | 224,118
|Latin America  |  |                | 47,710  |      |   | 45,955  |  |   | 48,468 
|Canada         |  |                | 58,227  |      |   | 49,602  |  |   | 43,006 
|United Kingdom |  |                | 59,776  |      |   | 47,290  |  |   | 48,226 
|Netherlands    |  |                | 7,925   |      |   | 8,535   |  |   | 9,278  
|Other Europe   |  |                | 14,146  |      |   | 12,964  |  |   | 12,491 
|Far East       |  |                | 18,441  |      |   | 16,827  |  |   | 13,213 
|Middle East    |  |                | 6,240   |      |   | 4,722   |  |   | 1,616  
|               |  |                |         |      |   |         |  |   |        
|Total          |  | $              | 489,031 |      | $ | 450,131 |  | $ | 400,416
|               |  |                |         |      |   |         |  |   |        



13.    CONDENSED CONSOLIDATING FINANCIAL INFORMATION



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



On May 1, 2001, the Company issued $200.0 million of 7.25% Senior Notes due
2011 (2011 Notes). The 2011 Notes are fully and unconditionally guaranteed, on a joint and several basis, by certain wholly-owned subsidiaries of the Company. Each of the guarantees is an unsecured obligation of the guarantor and ranks
pari passu with the guarantees provided by and the obligations of such guarantor subsidiaries under the credit facility, the 2012 Notes, the 2008 Notes, and with all existing and future unsecured indebtedness of such guarantor for
borrowed money that is not, by its terms, expressly subordinated in right of payment to such guarantee.



On February 25, 1998, the Company issued $100 million of 7.5% Senior Notes due 2008 (2008 Notes). The 2008 Notes are fully and unconditionally
guaranteed, on a joint and several basis, by certain wholly-owned subsidiaries of the Company. Each of the guarantees is an unsecured obligation of the guarantor and rankspari passu with the guarantees provided by and the obligations of such
guarantor subsidiaries under the Senior credit agreement, 2012 Notes and the 2011 Notes, and with all existing and future unsecured indebtedness of such guarantor for borrowed money that is not, by its terms, expressly subordinated in right of
payment to such guarantee.



The following condensed
consolidating balance sheets as of December 31, 2003 and 2002 and the related condensed consolidating statements of income and cash flows for each of the three years in the period ended December 31, 2003 should be read in conjunction with the notes
to these consolidated financial statements.



F-27



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|------------------------------------- |  | ----------------------------------------------- | --------- | - | --------------------- | - | --------- | ------------------------- |  | - | ------------ | - |  | ------------------------ | ---------- | - |  | - | --------- | -
|                                      |  | Year Ended December 31, 2003                    |          
|                                      |  | Varco International, Inc. (Parent Company only) |           |   | GuarantorSubsidiaries |   |           | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | VarcoInternational, Inc. |           
|                                      |  | (In thousands)                                  |          
|CONDENSED CONSOLIDATING BALANCE SHEET |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Current assets:                       |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Cash and cash equivalents             |  | $                                               | 5,899     |   |                       | $ | 49,904    |                           |  | $ | 29,945       |   |  | $                        |           |   |  | $ | 85,748    |  
|Accounts receivable, net              |  |                                                 | 198,557   |   |                       |   | 1,292,872 |                           |  |   | 875,218      |   |  |                          | (2,034,982 | ) |  |   | 331,665   |  
|Inventory, net                        |  |                                                 |          |   |                       |   | 196,699   |                           |  |   | 142,618      |   |  |                          |           |   |  |   | 339,317   |  
|Deferred tax assets                   |  |                                                 |          |   |                       |   | 14,206    |                           |  |   | 2,691        |   |  |                          |           |   |  |   | 16,897    |  
|Other current assets                  |  |                                                 |          |   |                       |   | 12,379    |                           |  |   | 11,419       |   |  |                          |           |   |  |   | 23,798    |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total current assets                  |  |                                                 | 204,456   |   |                       |   | 1,566,060 |                           |  |   | 1,061,891    |   |  |                          | (2,034,982 | ) |  |   | 797,425   |  
|Investment in subsidiaries            |  |                                                 | 1,375,890 |   |                       |   | 608,893   |                           |  |   |             |   |  |                          | (1,984,783 | ) |  |   |          |  
|Property and equipment, net           |  |                                                 |          |   |                       |   | 311,389   |                           |  |   | 177,642      |   |  |                          |           |   |  |   | 489,031   |  
|Identifiable intangibles, net         |  |                                                 |          |   |                       |   | 28,624    |                           |  |   | 2,869        |   |  |                          |           |   |  |   | 31,493    |  
|Goodwill, net                         |  |                                                 |          |   |                       |   | 304,606   |                           |  |   | 129,310      |   |  |                          |           |   |  |   | 433,916   |  
|Other assets, net                     |  |                                                 | 3,533     |   |                       |   | 6,499     |                           |  |   | 2,442        |   |  |                          |           |   |  |   | 12,474    |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total assets                          |  | $                                               | 1,583,879 |   |                       | $ | 2,826,071 |                           |  | $ | 1,374,154    |   |  | $                        | (4,019,765 | ) |  | $ | 1,764,339 |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Current liabilities:                  |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Accounts payable                      |  | $                                               | 118,018   |   |                       | $ | 1,322,991 |                           |  | $ | 692,362      |   |  | $                        | (2,034,982 | ) |  | $ | 98,389    |  
|Accrued liabilities                   |  |                                                 | 9,910     |   |                       |   | 72,431    |                           |  |   | 43,360       |   |  |                          |           |   |  |   | 125,701   |  
|Income taxes                          |  |                                                 |          |   |                       |   | 14,719    |                           |  |   | (6,877       | ) |  |                          |           |   |  |   | 7,842     |  
|Current portion of long-term debt     |  |                                                 |          |   |                       |   | 4,121     |                           |  |   | 2,326        |   |  |                          |           |   |  |   | 6,447     |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total current liabilities             |  |                                                 | 127,928   |   |                       |   | 1,414,262 |                           |  |   | 731,171      |   |  |                          | (2,034,982 | ) |  |   | 238,379   |  
|Long-term debt                        |  |                                                 | 445,792   |   |                       |   | 3,008     |                           |  |   | 1,671        |   |  |                          |           |   |  |   | 450,471   |  
|Pension liabilities                   |  |                                                 | 15,917    |   |                       |   |          |                           |  |   | 13,597       |   |  |                          |           |   |  |   | 29,514    |  
|Deferred taxes payable                |  |                                                 |          |   |                       |   | 27,742    |                           |  |   | 18,479       |   |  |                          |           |   |  |   | 46,221    |  
|Other liabilities                     |  |                                                 |          |   |                       |   | 5,169     |                           |  |   | 343          |   |  |                          |           |   |  |   | 5,512     |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total liabilities                     |  |                                                 | 589,637   |   |                       |   | 1,450,181 |                           |  |   | 765,261      |   |  |                          | (2,034,982 | ) |  |   | 770,097   |  
|Common stock                          |  |                                                 | 992       |   |                       |   |          |                           |  |   |             |   |  |                          |           |   |  |   | 992       |  
|Paid in capital                       |  |                                                 | 535,244   |   |                       |   | 768,377   |                           |  |   | 278,395      |   |  |                          | (1,046,772 | ) |  |   | 535,244   |  
|Retained earnings                     |  |                                                 | 494,598   |   |                       |   | 608,571   |                           |  |   | 335,683      |   |  |                          | (944,254   | ) |  |   | 494,598   |  
|Cumulative translation adjustment     |  |                                                 | (6,243    | ) |                       |   | (1,058    | )                         |  |   | (5,185       | ) |  |                          | 6,243      |   |  |   | (6,243    | )
|Treasury stock                        |  |                                                 | (30,349   | ) |                       |   |          |                           |  |   |             |   |  |                          |           |   |  |   | (30,349   | )
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total common stockholders equity     |  |                                                 | 994,242   |   |                       |   | 1,375,890 |                           |  |   | 608,893      |   |  |                          | (1,984,783 | ) |  |   | 994,242   |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total liabilities and equity          |  | $                                               | 1,583,879 |   |                       | $ | 2,826,071 |                           |  | $ | 1,374,154    |   |  | $                        | (4,019,765 | ) |  | $ | 1,764,339 |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  



F-28



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|------------------------------------- |  | ----------------------------------------------- | --------- | - | --------------------- | - | --------- | ------------------------- |  | - | ------------ | - |  | ------------------------ | ---------- | - |  | - | --------- | -
|                                      |  | Year Ended December 31, 2002                    |          
|                                      |  | Varco International, Inc. (Parent Company only) |           |   | GuarantorSubsidiaries |   |           | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | VarcoInternational, Inc. |           
|                                      |  | (In thousands)                                  |          
|CONDENSED CONSOLIDATING BALANCE SHEET |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Current assets:                       |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Cash and cash equivalents             |  | $                                               | 4,221     |   |                       | $ | 63,547    |                           |  | $ | 38,229       |   |  | $                        |           |   |  | $ | 105,997   |  
|Accounts receivable, net              |  |                                                 | 272,340   |   |                       |   | 1,147,297 |                           |  |   | 1,072,233    |   |  |                          | (2,168,414 | ) |  |   | 323,456   |  
|Inventory, net                        |  |                                                 |          |   |                       |   | 193,787   |                           |  |   | 86,171       |   |  |                          |           |   |  |   | 279,958   |  
|Other current assets                  |  |                                                 |          |   |                       |   | 26,057    |                           |  |   | 12,510       |   |  |                          |           |   |  |   | 38,567    |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total current assets                  |  |                                                 | 276,561   |   |                       |   | 1,430,688 |                           |  |   | 1,209,143    |   |  |                          | (2,168,414 | ) |  |   | 747,978   |  
|Investment in subsidiaries            |  |                                                 | 1,228,861 |   |                       |   | 521,277   |                           |  |   |             |   |  |                          | (1,750,138 | ) |  |   |          |  
|Property and equipment, net           |  |                                                 |          |   |                       |   | 304,013   |                           |  |   | 146,118      |   |  |                          |           |   |  |   | 450,131   |  
|Identifiable intangibles, net         |  |                                                 |          |   |                       |   | 29,160    |                           |  |   | 3,758        |   |  |                          |           |   |  |   | 32,918    |  
|Goodwill, net                         |  |                                                 |          |   |                       |   | 285,788   |                           |  |   | 132,871      |   |  |                          |           |   |  |   | 418,659   |  
|Other assets, net                     |  |                                                 | 3,860     |   |                       |   | 3,689     |                           |  |   | 3,825        |   |  |                          |           |   |  |   | 11,374    |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total assets                          |  | $                                               | 1,509,282 |   |                       | $ | 2,574,615 |                           |  | $ | 1,495,715    |   |  | $                        | (3,918,552 | ) |  | $ | 1,661,060 |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Current liabilities:                  |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Accounts payable                      |  | $                                               | 118,009   |   |                       | $ | 1,244,406 |                           |  | $ | 896,603      |   |  | $                        | (2,168,414 | ) |  | $ | 90,604    |  
|Accrued liabilities                   |  |                                                 | 6,264     |   |                       |   | 66,831    |                           |  |   | 38,335       |   |  |                          |           |   |  |   | 111,430   |  
|Income taxes                          |  |                                                 |          |   |                       |   | 9,348     |                           |  |   | (96          | ) |  |                          |           |   |  |   | 9,252     |  
|Current portion of long-term debt     |  |                                                 |          |   |                       |   | 2,353     |                           |  |   | 4,692        |   |  |                          |           |   |  |   | 7,045     |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total current liabilities             |  |                                                 | 124,273   |   |                       |   | 1,322,938 |                           |  |   | 939,534      |   |  |                          | (2,168,414 | ) |  |   | 218,331   |  
|Long-term debt                        |  |                                                 | 449,839   |   |                       |   | 6,191     |                           |  |   | 4,853        |   |  |                          |           |   |  |   | 460,883   |  
|Pension liabilities                   |  |                                                 | 14,888    |   |                       |   |          |                           |  |   | 10,011       |   |  |                          |           |   |  |   | 24,899    |  
|Deferred taxes payable                |  |                                                 |          |   |                       |   | 15,919    |                           |  |   | 19,333       |   |  |                          |           |   |  |   | 35,252    |  
|Other liabilities                     |  |                                                 |          |   |                       |   | 706       |                           |  |   | 707          |   |  |                          |           |   |  |   | 1,413     |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total liabilities                     |  |                                                 | 589,000   |   |                       |   | 1,345,754 |                           |  |   | 974,438      |   |  |                          | (2,168,414 | ) |  |   | 740,778   |  
|Common stock                          |  |                                                 | 984       |   |                       |   |          |                           |  |   |             |   |  |                          |           |   |  |   | 984       |  
|Paid in capital                       |  |                                                 | 525,782   |   |                       |   | 720,068   |                           |  |   | 254,917      |   |  |                          | (974,985   | ) |  |   | 525,782   |  
|Retained earnings                     |  |                                                 | 427,355   |   |                       |   | 509,851   |                           |  |   | 283,811      |   |  |                          | (793,662   | ) |  |   | 427,355   |  
|Cumulative translation adjustment     |  |                                                 | (18,509   | ) |                       |   | (1,058    | )                         |  |   | (17,451      | ) |  |                          | 18,509     |   |  |   | (18,509   | )
|Treasury stock                        |  |                                                 | (15,330   | ) |                       |   |          |                           |  |   |             |   |  |                          |           |   |  |   | (15,330   | )
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total common stockholders equity     |  |                                                 | 920,282   |   |                       |   | 1,228,861 |                           |  |   | 521,277      |   |  |                          | (1,750,138 | ) |  |   | 920,282   |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  
|Total liabilities and equity          |  | $                                               | 1,509,282 |   |                       | $ | 2,574,615 |                           |  | $ | 1,495,715    |   |  | $                        | (3,918,552 | ) |  | $ | 1,661,060 |  
|                                      |  |                                                 |           |   |                       |   |           |                           |  |   |              |   |  |                          |            |   |  |   |           |  



F-29



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|---------------------------------------------------- |  | ----------------------------------------------- | ------- | - | --------------------- | - | --------- | ------------------------- |  | ------------ | ------- |  | ------------------------ | -------- | - |  | - | ---------
|                                                     |  | Year Ended December 31, 2003                   
|                                                     |  | Varco International, Inc. (Parent Company only) |         |   | GuarantorSubsidiaries |   |           | Non-GuarantorSubsidiaries |  | Eliminations |         |  | VarcoInternational, Inc.
|                                                     |  | (In thousands)                                 
|CONDENSED CONSOLIDATING STATEMENT OF INCOME          |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|Revenue                                              |  | $                                               |        |   |                       | $ | 1,070,038 |                           |  | $            | 559,997 |  | $                        | (180,428 | ) |  | $ | 1,449,607
|Cost of sales                                        |  |                                                 |        |   |                       |   | 818,618   |                           |  |              | 417,921 |  |                          | (180,428 | ) |  |   | 1,056,111
|Selling, general and administrative                  |  |                                                 | 1,338   |   |                       |   | 125,683   |                           |  |              | 53,819  |  |                          |         |   |  |   | 180,840  
|Research and engineering costs                       |  |                                                 |        |   |                       |   | 54,415    |                           |  |              | 7,091   |  |                          |         |   |  |   | 61,506   
|Merger, transaction, impairment and litigation costs |  |                                                 |        |   |                       |   |          |                           |  |              | 11,169  |  |                          |         |   |  |   | 11,169   
|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|Total costs                                          |  |                                                 | 1,338   |   |                       |   | 998,716   |                           |  |              | 490,000 |  |                          | (180,428 | ) |  |   | 1,309,626
|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|Operating profit (loss)                              |  |                                                 | (1,338  | ) |                       |   | 71,322    |                           |  |              | 69,997  |  |                          |         |   |  |   | 139,981  
|Other expenses (income)                              |  |                                                 | 759     |   |                       |   | (97       | )                         |  |              | 1,581   |  |                          |         |   |  |   | 2,243    
|Interest expense                                     |  |                                                 | 29,380  |   |                       |   | 35        |                           |  |              | 753     |  |                          |         |   |  |   | 30,168   
|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|Income (loss) before income taxes                    |  |                                                 | (31,477 | ) |                       |   | 71,384    |                           |  |              | 67,663  |  |                          |         |   |  |   | 107,570  
|Provision for income taxes                           |  |                                                 |        |   |                       |   | 24,536    |                           |  |              | 15,791  |  |                          |         |   |  |   | 40,327   
|Equity in net income of subsidiaries                 |  |                                                 | 98,720  |   |                       |   | 51,872    |                           |  |              |        |  |                          | (150,592 | ) |  |   |         
|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|Net income                                           |  | $                                               | 67,243  |   |                       | $ | 98,720    |                           |  | $            | 51,872  |  | $                        | (150,592 | ) |  | $ | 67,243   
|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|                                                     | 
|                                                     |  | Year Ended December 31, 2002                   
|                                                     |  | Varco International, Inc. (Parent Company only) |         |   | GuarantorSubsidiaries |   |           | Non-GuarantorSubsidiaries |  | Eliminations |         |  | VarcoInternational, Inc.
|                                                     |  | (In thousands)                                 
|CONDENSED CONSOLIDATING STATEMENT OF INCOME          |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|Revenue                                              |  | $                                               |        |   |                       | $ | 953,398   |                           |  | $            | 551,904 |  | $                        | (170,238 | ) |  | $ | 1,335,064
|Cost of sales                                        |  |                                                 |        |   |                       |   | 707,558   |                           |  |              | 414,737 |  |                          | (170,238 | ) |  |   | 952,057  
|Selling, general and administrative                  |  |                                                 |        |   |                       |   | 115,607   |                           |  |              | 47,776  |  |                          |         |   |  |   | 163,383  
|Research and engineering costs                       |  |                                                 |        |   |                       |   | 50,740    |                           |  |              | 6,332   |  |                          |         |   |  |   | 57,072   
|Merger, transaction, impairment and litigation costs |  |                                                 |        |   |                       |   | 6,292     |                           |  |              | 195     |  |                          |         |   |  |   | 6,487    
|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|Total costs                                          |  |                                                 |        |   |                       |   | 880,197   |                           |  |              | 469,040 |  |                          | (170,238 | ) |  |   | 1,178,999
|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|Operating profit                                     |  |                                                 |        |   |                       |   | 73,201    |                           |  |              | 82,864  |  |                          |         |   |  |   | 156,065  
|Other expenses (income)                              |  |                                                 | 1,339   |   |                       |   | (182      | )                         |  |              | 6,521   |  |                          |         |   |  |   | 7,678    
|Interest expense                                     |  |                                                 | 23,556  |   |                       |   | 661       |                           |  |              | 1,391   |  |                          |         |   |  |   | 25,608   
|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|Income (loss) before income taxes                    |  |                                                 | (24,895 | ) |                       |   | 72,722    |                           |  |              | 74,952  |  |                          |         |   |  |   | 122,779  
|Provision for income taxes                           |  |                                                 |        |   |                       |   | 20,621    |                           |  |              | 22,351  |  |                          |         |   |  |   | 42,972   
|Equity in net income of subsidiaries                 |  |                                                 | 104,702 |   |                       |   | 52,601    |                           |  |              |        |  |                          | (157,303 | ) |  |   |         
|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          
|Net income                                           |  | $                                               | 79,807  |   |                       | $ | 104,702   |                           |  | $            | 52,601  |  | $                        | (157,303 | ) |  | $ | 79,807   
|                                                     |  |                                                 |         |   |                       |   |           |                           |  |              |         |  |                          |          |   |  |   |          



F-30



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                     |  |                                                 |         |   |                       |   |                           |  |              |         |  |                          |          |   |  |   |          
|---------------------------------------------------- |  | ----------------------------------------------- | ------- | - | --------------------- | - | ------------------------- |  | ------------ | ------- |  | ------------------------ | -------- | - |  | - | ---------
|                                                     |  | Year Ended December 31, 2001                   
|                                                     |  | Varco International, Inc. (Parent Company only) |         |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  | Eliminations |         |  | VarcoInternational, Inc.
|                                                     |  | (In thousands)                                 
|CONDENSED CONSOLIDATING STATEMENT OF INCOME          |  |                                                 |         |   |                       |   |                           |  |              |         |  |                          |          |   |  |   |          
|Revenue                                              |  | $                                               |        |   |                       | $ | 943,231                   |  | $            | 485,548 |  | $                        | (160,970 | ) |  | $ | 1,267,809
|Cost of sales                                        |  |                                                 |        |   |                       |   | 700,382                   |  |              | 344,403 |  |                          | (160,970 | ) |  |   | 883,815  
|Amortization of goodwill                             |  |                                                 |        |   |                       |   | 5,348                     |  |              | 5,109   |  |                          |         |   |  |   | 10,457   
|Selling, general and administrative                  |  |                                                 |        |   |                       |   | 110,710                   |  |              | 41,566  |  |                          |         |   |  |   | 152,276  
|Research and engineering costs                       |  |                                                 |        |   |                       |   | 41,362                    |  |              | 5,273   |  |                          |         |   |  |   | 46,635   
|Merger, transaction, impairment and litigation costs |  |                                                 |        |   |                       |   | 16,500                    |  |              |        |  |                          |         |   |  |   | 16,500   
|                                                     |  |                                                 |         |   |                       |   |                           |  |              |         |  |                          |          |   |  |   |          
|Total costs                                          |  |                                                 |        |   |                       |   | 874,302                   |  |              | 396,351 |  |                          | (160,970 | ) |  |   | 1,109,683
|                                                     |  |                                                 |         |   |                       |   |                           |  |              |         |  |                          |          |   |  |   |          
|Operating profit                                     |  |                                                 |        |   |                       |   | 68,929                    |  |              | 89,197  |  |                          |         |   |  |   | 158,126  
|Other expenses                                       |  |                                                 | 926     |   |                       |   | 1,947                     |  |              | 1,382   |  |                          |         |   |  |   | 4,255    
|Interest expense                                     |  |                                                 | 19,724  |   |                       |   | 949                       |  |              | 1,103   |  |                          |         |   |  |   | 21,776   
|                                                     |  |                                                 |         |   |                       |   |                           |  |              |         |  |                          |          |   |  |   |          
|Income (loss) before income taxes                    |  |                                                 | (20,650 | ) |                       |   | 66,033                    |  |              | 86,712  |  |                          |         |   |  |   | 132,095  
|Provision for income taxes                           |  |                                                 |        |   |                       |   | 24,647                    |  |              | 24,480  |  |                          |         |   |  |   | 49,127   
|Equity in net income of subsidiaries                 |  |                                                 | 103,618 |   |                       |   | 62,232                    |  |              |        |  |                          | (165,850 | ) |  |   |         
|                                                     |  |                                                 |         |   |                       |   |                           |  |              |         |  |                          |          |   |  |   |          
|Net income                                           |  | $                                               | 82,968  |   |                       | $ | 103,618                   |  | $            | 62,232  |  | $                        | (165,850 | ) |  | $ | 82,968   
|                                                     |  |                                                 |         |   |                       |   |                           |  |              |         |  |                          |          |   |  |   |          



F-31



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                      |  |                                                 |         |   |                       |   |         |                           |  |   |              |   |  |                          |         |   |  |   |          |  
|----------------------------------------------------- |  | ----------------------------------------------- | ------- | - | --------------------- | - | ------- | ------------------------- |  | - | ------------ | - |  | ------------------------ | ------- | - |  | - | -------- | -
|                                                      |  | Year Ended December 31, 2003                    |        
|                                                      |  | Varco International, Inc. (Parent Company only) |         |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | Eliminations |   |  | VarcoInternational, Inc. |        
|                                                      |  | (In thousands)                                  |        
|CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS       |  |                                                 |         |   |                       |   |         |                           |  |   |              |   |  |                          |         |   |  |   |          |  
|Net cash provided by (used for) operating activities  |  | $                                               | 47,317  |   |                       | $ | 47,062  |                           |  | $ | 41,336       |   |  | $                        | (34,952 | ) |  | $ | 100,763  |  
|Net cash provided by (used for) investing activities: |  |                                                 |         |   |                       |   |         |                           |  |   |              |   |  |                          |         |   |  |   |          |  
|Capital expenditures                                  |  |                                                 |        |   |                       |   | (44,765 | )                         |  |   | (22,327      | ) |  |                          |        |   |  |   | (67,092  | )
|Business acquisitions, net of cash acquired           |  |                                                 |        |   |                       |   | (15,473 | )                         |  |   | (23,478      | ) |  |                          |        |   |  |   | (38,951  | )
|Investments in subsidiaries                           |  |                                                 | (48,309 | ) |                       |   |        |                           |  |   |             |   |  |                          | 48,309  |   |  |   |         |  
|Other                                                 |  |                                                 |        |   |                       |   |        |                           |  |   | (548         | ) |  |                          |        |   |  |   | (548     | )
|                                                      |  |                                                 |         |   |                       |   |         |                           |  |   |              |   |  |                          |         |   |  |   |          |  
|Net cash provided by (used for) investing activities  |  |                                                 | (48,309 | ) |                       |   | (60,238 | )                         |  |   | (46,353      | ) |  |                          | 48,309  |   |  |   | (106,591 | )
|Net cash provided by (used for) financing activities: |  |                                                 |         |   |                       |   |         |                           |  |   |              |   |  |                          |         |   |  |   |          |  
|Net borrowings (payments) under financing agreements  |  |                                                 | (4,047  | ) |                       |   | (467    | )                         |  |   | (4,002       | ) |  |                          |        |   |  |   | (8,516   | )
|Net proceeds from sale of common stock, net           |  |                                                 | 8,379   |   |                       |   |        |                           |  |   |             |   |  |                          |        |   |  |   | 8,379    |  
|Purchase of treasury stock                            |  |                                                 | (15,019 | ) |                       |   |        |                           |  |   |             |   |  |                          |        |   |  |   | (15,019  | )
|Other                                                 |  |                                                 | 13,357  |   |                       |   |        |                           |  |   |             |   |  |                          | (13,357 | ) |  |   |         |  
|                                                      |  |                                                 |         |   |                       |   |         |                           |  |   |              |   |  |                          |         |   |  |   |          |  
|Net cash provided by (used for) financing activities  |  |                                                 | 2,670   |   |                       |   | (467    | )                         |  |   | (4,002       | ) |  |                          | (13,357 | ) |  |   | (15,156  | )
|Effect of exchange rate changes on cash               |  |                                                 |        |   |                       |   |        |                           |  |   | 735          |   |  |                          |        |   |  |   | 735      |  
|Net increase (decrease) in cash and cash equivalents  |  |                                                 | 1,678   |   |                       |   | (13,643 | )                         |  |   | (8,284       | ) |  |                          |        |   |  |   | (20,249  | )
|Cash and cash equivalents:                            |  |                                                 |         |   |                       |   |         |                           |  |   |              |   |  |                          |         |   |  |   |          |  
|Beginning of period                                   |  |                                                 | 4,221   |   |                       |   | 63,547  |                           |  |   | 38,229       |   |  |                          |        |   |  |   | 105,997  |  
|                                                      |  |                                                 |         |   |                       |   |         |                           |  |   |              |   |  |                          |         |   |  |   |          |  
|End of period                                         |  | $                                               | 5,899   |   |                       | $ | 49,904  |                           |  | $ | 29,945       |   |  | $                        |        |   |  | $ | 85,748   |  
|                                                      |  |                                                 |         |   |                       |   |         |                           |  |   |              |   |  |                          |         |   |  |   |          |  



F-32



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                      |  |                                                |          |   |                       |   |          |                            |  |   |              |   |  |                         |          |   |  |   |          |  
|----------------------------------------------------- |  | ---------------------------------------------- | -------- | - | --------------------- | - | -------- | -------------------------- |  | - | ------------ | - |  | ----------------------- | -------- | - |  | - | -------- | -
|                                                      |  | Year Ended December 31, 2002                   |         
|                                                      |  | VarcoInternational, Inc. (Parent Company only) |          |   | GuarantorSubsidiaries |   |          | Non- GuarantorSubsidiaries |  |   | Eliminations |   |  | VarcoInternational,Inc. |         
|                                                      |  | (In thousands)                                 |         
|CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS       |  |                                                |          |   |                       |   |          |                            |  |   |              |   |  |                         |          |   |  |   |          |  
|Net cash provided by (used for) operating activities  |  | $                                              | (23,041  | ) |                       | $ | 215,128  |                            |  | $ | 49,354       |   |  | $                       | (139,658 | ) |  | $ | 101,783  |  
|Net cash provided by (used for) investing activities: |  |                                                |          |   |                       |   |          |                            |  |   |              |   |  |                         |          |   |  |   |          |  
|Capital expenditures                                  |  |                                                |         |   |                       |   | (29,924  | )                          |  |   | (19,453      | ) |  |                         |         |   |  |   | (49,377  | )
|Business acquisitions, net of cash acquired           |  |                                                |         |   |                       |   | (139,376 | )                          |  |   | (12,987      | ) |  |                         |         |   |  |   | (152,363 | )
|Investments in subsidiaries                           |  |                                                | (139,658 | ) |                       |   |         |                            |  |   |             |   |  |                         | 139,658  |   |  |   |         |  
|Other                                                 |  |                                                |         |   |                       |   |         |                            |  |   | (593         | ) |  |                         |          |   |  |   | (593     | )
|                                                      |  |                                                |          |   |                       |   |          |                            |  |   |              |   |  |                         |          |   |  |   |          |  
|Net cash provided by (used for) investing activities  |  |                                                | (139,658 | ) |                       |   | (169,300 | )                          |  |   | (33,033      | ) |  |                         | 139,658  |   |  |   | (202,333 | )
|Net cash provided by (used for) financing activities: |  |                                                |          |   |                       |   |          |                            |  |   |              |   |  |                         |          |   |  |   |          |  
|Net borrowings (payments) under financing agreements  |  |                                                | 152,201  |   |                       |   | (7,418   | )                          |  |   | (5,563       | ) |  |                         |         |   |  |   | 139,220  |  
|Debt issue costs                                      |  |                                                | (1,732   | ) |                       |   |         |                            |  |   |             |   |  |                         |         |   |  |   | (1,732   | )
|Proceeds from cash flow hedge                         |  |                                                | 1,346    |   |                       |   |         |                            |  |   |             |   |  |                         |         |   |  |   | 1,346    |  
|Net proceeds from sale of common stock, net           |  |                                                | 9,543    |   |                       |   |         |                            |  |   |             |   |  |                         |          |   |  |   | 9,543    |  
|                                                      |  |                                                |          |   |                       |   |          |                            |  |   |              |   |  |                         |          |   |  |   |          |  
|Net cash provided by (used for) financing activities  |  |                                                | 161,358  |   |                       |   | (7,418   | )                          |  |   | (5,563       | ) |  |                         |         |   |  |   | 148,377  |  
|Effect of exchange rate changes on cash               |  |                                                |         |   |                       |   |         |                            |  |   | 671          |   |  |                         |         |   |  |   | 671      |  
|Net increase (decrease) in cash and cash equivalents  |  |                                                | (1,341   | ) |                       |   | 38,410   |                            |  |   | 11,429       |   |  |                         |         |   |  |   | 48,498   |  
|Cash and cash equivalents:                            |  |                                                |          |   |                       |   |          |                            |  |   |              |   |  |                         |          |   |  |   |          |  
|Beginning of period                                   |  |                                                | 5,562    |   |                       |   | 25,137   |                            |  |   | 26,800       |   |  |                         |         |   |  |   | 57,499   |  
|                                                      |  |                                                |          |   |                       |   |          |                            |  |   |              |   |  |                         |          |   |  |   |          |  
|End of period                                         |  | $                                              | 4,221    |   |                       | $ | 63,547   |                            |  | $ | 38,229       |   |  | $                       |         |   |  | $ | 105,997  |  
|                                                      |  |                                                |          |   |                       |   |          |                            |  |   |              |   |  |                         |          |   |  |   |          |  



|                                                      |  |                                                |          |   |                        |   |          |                             |  |   |              |   |  |                         |          |   |  |   |          |  
|----------------------------------------------------- |  | ---------------------------------------------- | -------- | - | ---------------------- | - | -------- | --------------------------- |  | - | ------------ | - |  | ----------------------- | -------- | - |  | - | -------- | -
|                                                      |  | Year Ended December 31, 2001                   |         
|                                                      |  | VarcoInternational, Inc. (Parent Company only) |          |   | Guarantor Subsidiaries |   |          | Non- Guarantor Subsidiaries |  |   | Eliminations |   |  | VarcoInternational,Inc. |         
|                                                      |  | (In thousands)                                 |         
|CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS       |  |                                                |          |   |                        |   |          |                             |  |   |              |   |  |                         |          |   |  |   |          |  
|Net cash provided by (used for) operating activities  |  | $                                              | (38,262  | ) |                        | $ | 196,610  |                             |  | $ | 70,023       |   |  | $                       | (144,376 | ) |  | $ | 83,995   |  
|Net cash provided by (used for) investing activities: |  |                                                |          |   |                        |   |          |                             |  |   |              |   |  |                         |          |   |  |   |          |  
|Capital expenditures                                  |  |                                                |         |   |                        |   | (38,566  | )                           |  |   | (27,268      | ) |  |                         |         |   |  |   | (65,834  | )
|Business acquisitions, net of cash acquired           |  |                                                |         |   |                        |   | (109,290 | )                           |  |   | (36,663      | ) |  |                         |         |   |  |   | (145,953 | )
|Investments in subsidiaries                           |  |                                                | (144,376 | ) |                        |   |         |                             |  |   |             |   |  |                         | 144,376  |   |  |   |         |  
|Other                                                 |  |                                                |         |   |                        |   |         |                             |  |   | 661          |   |  |                         |         |   |  |   | 661      |  
|                                                      |  |                                                |          |   |                        |   |          |                             |  |   |              |   |  |                         |          |   |  |   |          |  
|Net cash provided by (used for) investing activities  |  |                                                | (144,376 | ) |                        |   | (147,856 | )                           |  |   | (63,270      | ) |  |                         | 144,376  |   |  |   | (211,126 | )
|Net cash provided by (used for) financing activities: |  |                                                |          |   |                        |   |          |                             |  |   |              |   |  |                         |          |   |  |   |          |  
|Net borrowings (payments) under financing agreements  |  |                                                | 179,850  |   |                        |   | (20,888  | )                           |  |   | 5,806        |   |  |                         |         |   |  |   | 164,768  |  
|Debt issue costs                                      |  |                                                | (1,782   | ) |                        |   |         |                             |  |   |             |   |  |                         |         |   |  |   | (1,782   | )
|                                                      |  |                                                |          |   |                        |   |          |                             |  |   |              |   |  |                         |          |   |  |   |          |  
|Net proceeds from sale of common stock                |  |                                                | 10,132   |   |                        |   |         |                             |  |   |             |   |  |                         |         |   |  |   | 10,132   |  
|                                                      |  |                                                |          |   |                        |   |          |                             |  |   |              |   |  |                         |          |   |  |   |          |  
|Net cash provided by (used for) financing activities  |  |                                                | 188,200  |   |                        |   | (20,888  | )                           |  |   | 5,806        |   |  |                         |         |   |  |   | 173,118  |  
|Effect of exchange rate changes on cash               |  |                                                |         |   |                        |   |         |                             |  |   | (664         | ) |  |                         |         |   |  |   | (664     | )
|Net increase in cash and cash equivalents             |  |                                                | 5,562    |   |                        |   | 27,866   |                             |  |   | 11,895       |   |  |                         |         |   |  |   | 45,323   |  
|Cash and cash equivalents:                            |  |                                                |          |   |                        |   |          |                             |  |   |              |   |  |                         |          |   |  |   |          |  
|Beginning of period                                   |  |                                                |         |   |                        |   | (2,729   | )                           |  |   | 14,905       |   |  |                         |         |   |  |   | 12,176   |  
|                                                      |  |                                                |          |   |                        |   |          |                             |  |   |              |   |  |                         |          |   |  |   |          |  
|End of period                                         |  | $                                              | 5,562    |   |                        | $ | 25,137   |                             |  | $ | 26,800       |   |  | $                       |         |   |  | $ | 57,499   |  
|                                                      |  |                                                |          |   |                        |   |          |                             |  |   |              |   |  |                         |          |   |  |   |          |  



F-33



---

VARCO INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|14.Quarterly |  | Financial Information (Unaudited)
|------------ |  | ---------------------------------



Summarized quarterly financial information for 2003 and 2002 is as follows:



|               |  |                                       |           |                  |   |           |  |                                 |        |                                   |   |      |  |   |     
|-------------- |  | ------------------------------------- | --------- | ---------------- | - | --------- |  | ------------------------------- | ------ | --------------------------------- | - | ---- |  | - | ----
|               |  | Revenue                               |           | Operating Profit |   | NetIncome |  | Basic Earnings Per Common Share |        | DilutiveEarnings Per Common Share
|               |  | (In thousands, except per share data)
|2003           |  |                                       |           |                  |   |           |  |                                 |        |                                   |   |      |  |   |     
|First Quarter  |  | $                                     | 367,477   |                  | $ | 41,552    |  | $                               | 20,934 |                                   | $ | 0.22 |  | $ | 0.21
|Second Quarter |  |                                       | 357,457   |                  |   | 30,875    |  |                                 | 15,115 |                                   |   | 0.16 |  |   | 0.15
|Third Quarter  |  |                                       | 374,976   |                  |   | 48,079    |  |                                 | 26,639 |                                   |   | 0.27 |  |   | 0.27
|Fourth Quarter |  |                                       | 349,697   |                  |   | 19,475    |  |                                 | 4,555  |                                   |   | 0.05 |  |   | 0.05
|               |  |                                       |           |                  |   |           |  |                                 |        |                                   |   |      |  |   |     
|Total Year     |  | $                                     | 1,449,607 |                  | $ | 139,981   |  | $                               | 67,243 |                                   | $ | 0.69 |  | $ | 0.68
|               |  |                                       |           |                  |   |           |  |                                 |        |                                   |   |      |  |   |     
|2002           |  |                                       |           |                  |   |           |  |                                 |        |                                   |   |      |  |   |     
|First Quarter  |  | $                                     | 310,568   |                  | $ | 35,896    |  | $                               | 17,287 |                                   | $ | 0.18 |  | $ | 0.18
|Second Quarter |  |                                       | 336,053   |                  |   | 42,928    |  |                                 | 21,063 |                                   |   | 0.22 |  |   | 0.22
|Third Quarter  |  |                                       | 333,939   |                  |   | 38,694    |  |                                 | 20,052 |                                   |   | 0.21 |  |   | 0.21
|Fourth Quarter |  |                                       | 354,504   |                  |   | 38,547    |  |                                 | 21,405 |                                   |   | 0.22 |  |   | 0.22
|               |  |                                       |           |                  |   |           |  |                                 |        |                                   |   |      |  |   |     
|Total Year     |  | $                                     | 1,335,064 |                  | $ | 156,065   |  | $                               | 79,807 |                                   | $ | 0.83 |  | $ | 0.82
|               |  |                                       |           |                  |   |           |  |                                 |        |                                   |   |      |  |   |     



During the fourth
quarter of 2003, the Company recognized an asset impairment charge of $11,169,000 related to its drilling rig fabrication business.



During the first quarter of 2002, the Company incurred reorganization costs of $2,829,000 for early termination of employment agreements for several
senior executives arising from the Merger in 2000. The Company recorded transaction costs as a result of the acquisition of substantially all of the oilfield services business of ICO of $2,369,000 and $1,289,000 in the third and fourth quarters,
respectively, of 2002.





F-34



---

SCHEDULE I



VARCO INTERNATIONAL, INC.



CONDENSED FINANCIAL INFORMATION OF REGISTRANT



CONSOLIDATED BALANCE SHEETS

(Parent
Company Only)



December 31, 2003 and 2002



|                                                                                                                                                                                                                       |  |                |           |   |      |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                                       |  | December 31,   |          
|                                                                                                                                                                                                                       |  | 2003           |           |   | 2002 |  
|                                                                                                                                                                                                                       |  | (in thousands) |          
|ASSETS                                                                                                                                                                                                                 |  |                |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                                                                                                              |  | $              | 5,899     |   |      | $ | 4,221     |  
|Amounts due from affiliates                                                                                                                                                                                            |  |                | 198,557   |   |      |   | 272,340   |  
|Other assets                                                                                                                                                                                                           |  |                | 3,533     |   |      |   | 3,860     |  
|Investment in subsidiaries                                                                                                                                                                                             |  |                | 1,375,890 |   |      |   | 1,228,861 |  
|                                                                                                                                                                                                                       |  |                |           |   |      |   |           |  
|Total assets                                                                                                                                                                                                           |  | $              | 1,583,879 |   |      | $ | 1,509,282 |  
|                                                                                                                                                                                                                       |  |                |           |   |      |   |           |  
|                                                                                                                                                                                                                       |  |               
|LIABILITIES AND EQUITY                                                                                                                                                                                                 |  |                |           |   |      |   |           |  
|Amounts due to affiliates                                                                                                                                                                                              |  | $              | 118,018   |   |      | $ | 118,009   |  
|Accrued liabilities                                                                                                                                                                                                    |  |                | 9,910     |   |      |   | 6,264     |  
|Pension liabilities and post retirement obligations                                                                                                                                                                    |  |                | 15,917    |   |      |   | 14,888    |  
|Notes payable                                                                                                                                                                                                          |  |                | 445,792   |   |      |   | 449,839   |  
|                                                                                                                                                                                                                       |  |               
|Common stockholders equity:                                                                                                                                                                                           |  |                |           |   |      |   |           |  
|Common stock, $.01 par value 200,000,000 shares authorized, 99,150,487 shares issued and 96,908,207 shares outstanding at December 31, 2003
(98,416,012 shares issued and 96,991,312 outstanding at December 31, 2002) |  |                | 992       |   |      |   | 984       |  
|Paid-in capital                                                                                                                                                                                                        |  |                | 535,244   |   |      |   | 525,782   |  
|Retained earnings                                                                                                                                                                                                      |  |                | 494,598   |   |      |   | 427,355   |  
|Accumulated other comprehensive loss                                                                                                                                                                                   |  |                | (6,243    | ) |      |   | (18,509   | )
|Less: treasury stock at cost (2,242,280 and 1,424,700 shares at December 31, 2003 and 2002, respectively)                                                                                                              |  |                | (30,349   | ) |      |   | (15,330   | )
|                                                                                                                                                                                                                       |  |                |           |   |      |   |           |  
|Total common stockholders equity                                                                                                                                                                                      |  |                | 994,242   |   |      |   | 920,282   |  
|                                                                                                                                                                                                                       |  |                |           |   |      |   |           |  
|Total liabilities and equity                                                                                                                                                                                           |  | $              | 1,583,879 |   |      | $ | 1,509,282 |  
|                                                                                                                                                                                                                       |  |                |           |   |      |   |           |  





See notes to condensed financial statements.



S-1



---

SCHEDULE I



VARCO INTERNATIONAL, INC.



CONDENSED FINANCIAL INFORMATION OF REGISTRANT



CONDENSED STATEMENTS OF INCOME

(Parent Company Only)



Years ended December
31, 2003, 2002, 2001



|                                       |  |                          |         |   |      |   |         |      |  |   |         |  
|-------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                       |  | Years Ended December 31, |        
|                                       |  | 2003                     |         |   | 2002 |   |         | 2001 | 
|                                       |  | (in thousands)           |        
|Equity in net earnings of subsidiaries |  | $                        | 98,720  |   |      | $ | 104,702 |      |  | $ | 103,618 |  
|Interest expense                       |  |                          | (29,380 | ) |      |   | (23,556 | )    |  |   | (19,724 | )
|Other                                  |  |                          | (2,097  | ) |      |   | (1,339  | )    |  |   | (926    | )
|                                       |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                             |  | $                        | 67,243  |   |      | $ | 79,807  |      |  | $ | 82,968  |  
|                                       |  |                          |         |   |      |   |         |      |  |   |         |  









See notes to condensed financial statements.



S-2



---

SCHEDULE I



VARCO INTERNATIONAL, INC.



CONDENSED FINANCIAL INFORMATION OF REGISTRANT



CONDENSED STATEMENTS OF CASH FLOWS

(Parent Company Only)



Years ended December
31, 2003, 2002, 2001



|                                                                                             |  |                          |         |   |      |   |          |      |  |   |          |  
|-------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                             |  | Years Ended December 31, |        
|                                                                                             |  | 2003                     |         |   | 2002 |   |          | 2001 | 
|Cash flows from operating activities:                                                        |  |                          |         |   |      |   |          |      |  |   |          |  
|Net income                                                                                   |  | $                        | 67,243  |   |      | $ | 79,807   |      |  | $ | 82,968   |  
|Adjustments to reconcile net income to net cash provided by (used for) operating activities: |  |                          |         |   |      |   |          |      |  |   |          |  
|Equity in net earnings of subsidiaries                                                       |  |                          | (98,720 | ) |      |   | (104,702 | )    |  |   | (103,618 | )
|Changes in current assets and liabilities:                                                   |  |                          |         |   |      |   |          |      |  |   |          |  
|Accounts receivable                                                                          |  |                          |        |   |      |   | 1,276    |      |  |   | 1,011    |  
|Other assets                                                                                 |  |                          | 327     |   |      |   | 1,560    |      |  |   | (4,246   | )
|Pension liabilities and post-retirement obligations                                          |  |                          | 1,029   |   |      |   | (2,516   | )    |  |   | 17,404   |  
|Interest payable                                                                             |  |                          | 3,646   |   |      |   | 1,009    |      |  |   | 2,138    |  
|Amounts due from (to) affiliates, net                                                        |  |                          | 73,792  |   |      |   | 525      |      |  |   | (33,919  | )
|                                                                                             |  |                          |         |   |      |   |          |      |  |   |          |  
|Net cash provided by (used for) operating activities                                         |  |                          | 47,317  |   |      |   | (23,041  | )    |  |   | (38,262  | )
|                                                                                             |  |                          |         |   |      |   |          |      |  |   |          |  
|Cash flows used for investing activities:                                                    |  |                          |         |   |      |   |          |      |  |   |          |  
|Investment in subsidiaries                                                                   |  |                          | (48,309 | ) |      |   | (139,658 | )    |  |   | (144,376 | )
|                                                                                             |  |                          |         |   |      |   |          |      |  |   |          |  
|Cash flows provided by financing activities:                                                 |  |                          |         |   |      |   |          |      |  |   |          |  
|Borrowings (payments) under financing agreements, net                                        |  |                          | (4,047  | ) |      |   | 152,201  |      |  |   | 179,850  |  
|Other                                                                                        |  |                          | 13,357  |   |      |   | (386     | )    |  |   | (1,782   | )
|Proceeds from sale of common stock                                                           |  |                          | 8,379   |   |      |   | 9,543    |      |  |   | 10,132   |  
|Purchase of treasury stock                                                                   |  |                          | (15,019 | ) |      |   |         |      |  |   |         |  
|                                                                                             |  |                          |         |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                                    |  |                          | 2,670   |   |      |   | 161,358  |      |  |   | 188,200  |  
|                                                                                             |  |                          |         |   |      |   |          |      |  |   |          |  
|Net change in cash and cash equivalents                                                      |  |                          | 1,678   |   |      |   | (1,341   | )    |  |   | 5,562    |  
|Beginning of the year                                                                        |  |                          | 4,221   |   |      |   | 5,562    |      |  |   |         |  
|                                                                                             |  |                          |         |   |      |   |          |      |  |   |          |  
|End of year                                                                                  |  | $                        | 5,899   |   |      | $ | 4,221    |      |  | $ | 5,562    |  
|                                                                                             |  |                          |         |   |      |   |          |      |  |   |          |  





See notes to condensed financial statements.



S-3



---

SCHEDULE I



VARCO INTERNATIONAL, INC.



CONDENSED FINANCIAL INFORMATION OF REGISTRANT



NOTES TO CONDENSED FINANCIAL STATEMENTS



December 31, 2003, 2002, 2001



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



S-4



---

SCHEDULE II



VARCO INTERNATIONAL, INC.



VALUATION AND QUALIFYING ACCOUNTS



Years ended December 31, 2003, 2002, 2001



|                                                                      |  |                         |        |                                      |   |                    |  |   |                   |   |  |   |       
|--------------------------------------------------------------------- |  | ----------------------- | ------ | ------------------------------------ | - | ------------------ |  | - | ----------------- | - |  | - | ------
|                                                                      |  | BalanceBeginningof Year |        | AdditionsCharged toCosts andExpenses |   | ChargeoffsandOther |  |   | BalanceEnd ofYear
|                                                                      |  | (in thousands)         
|Allowance for doubtful accounts:                                      |  |                         |        |                                      |   |                    |  |   |                   |   |  |   |       
|2003                                                                  |  | $                       | 11,558 |                                      | $ | 3,369              |  | $ | (3,755            | ) |  | $ | 11,172
|2002                                                                  |  | $                       | 11,517 |                                      | $ | 2,894              |  | $ | (2,853            | ) |  | $ | 11,558
|2001                                                                  |  | $                       | 10,199 |                                      | $ | 6,326              |  | $ | (5,008            | ) |  | $ | 11,517
|                                                                      |  |                         |        |                                     
|Allowance for excess and obsolete inventory reserves (excludes LIFO): |  |                         |        |                                      |   |                    |  |   |                   |   |  |   |       
|2003                                                                  |  | $                       | 28,993 |                                      | $ | 7,405              |  | $ | (4,867            | ) |  | $ | 31,531
|2002                                                                  |  | $                       | 31,028 |                                      | $ | 7,702              |  | $ | (9,737            | ) |  | $ | 28,993
|2001                                                                  |  | $                       | 23,333 |                                      | $ | 9,507              |  | $ | (1,812            | ) |  | $ | 31,028
|                                                                      |  |                         |        |                                     
|Valuation allowance for deferred tax assets:                          |  |                         |        |                                      |   |                    |  |   |                   |   |  |   |       
|2003                                                                  |  | $                       | 1,975  |                                      | $ | 502                |  | $ |                  |   |  | $ | 2,477 
|2002                                                                  |  | $                       | 913    |                                      | $ | 1,062              |  | $ |                  |   |  | $ | 1,975 
|2001                                                                  |  | $                       | 967    |                                      | $ |                   |  | $ | (54               | ) |  | $ | 913   



S-5