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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549
                                ------------------
                                    FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

    For the fiscal year ended December 31, 2000

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

               For the transition period from ________to________

                           VARCO INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                   0-18312                   76-0252850
(State or other jurisdiction of  (Commission File No.)       (I.R.S. Employer
incorporation or organization)                               Identification No.)

       2835 Holmes Road, Houston, Texas                              77051
   (Address of principal executive offices)                       (Zip Code)

       Registrant's telephone number, including area code: (713) 799-5100

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

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

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

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

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 2001, was $1,858,392,162 based on the closing
sales price of such stock on such date.

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

     The number of shares outstanding of the registrant's common stock, as of
     February 28, 2001, was 95,374,137.

                              ------------------
                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's Proxy Statement for its 2001 Annual Meeting
are incorporated by this reference into Part III as set forth herein.

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                                    PART I

ITEM 1. BUSINESS

General

     Varco International, Inc. (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. The Company is the world's leading manufacturer
and supplier of innovative drilling systems and rig instrumentation; oilfield
tubular inspections and internal tubular coating techniques; drill cuttings
separation, control and disposal systems and services; and coiled tubing and
pressure control equipment for land and offshore drilling operations. The
Company also provides in-service pipeline inspections, manufactures high
pressure fiberglass tubulars, and sells and leases advanced in-line inspection
equipment to makers of oil country tubular goods. The Company has a long
tradition of pioneering many drilling and production innovations which have
steadily improved the efficiency, safety, cost and environmental impact of
petroleum operations.

     The Company is engaged in the design, manufacture, sale and rental of
drilling and well-remediation equipment, and is engaged in the provision of
technical services around the world, with operations spanning six continents, 49
countries and every major oilfield market in the world. The Company underwent a
significant transformation in May 2000 when Varco International, Inc., a
California corporation ("Varco"), merged into Tuboscope Inc. ("Tuboscope"). The
Merger has been accounted for as a pooling of interests, and unless otherwise
indicated, the financial, historical and other information included herein is
for the combined company. The Company's common stock is traded on the New York
Stock Exchange under the symbol "VRC." The Company operates through four
business groups: Drilling Equipment Sales, Tubular Services, Drilling Services,
and Coiled Tubing & Wireline Products.

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

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

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

     The Coiled Tubing & Wireline Products group sells highly-engineered coiled
tubing equipment, related pressure control equipment, 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 independent
producers.

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

<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                                 2000            1999           1998
                                                                 ----            ----           ----
                                                                            (in thousands)
    <S>                                                       <C>             <C>            <C>
     Drilling Equipment Sales.............................     $283,360        $504,245       $623,268
     Tubular Services.....................................      248,099         194,929        276,952
     Drilling Services....................................      250,229         202,518        286,052
     Coiled Tubing & Wireline Products....................       84,927          74,156        121,409
                                                              ---------       ---------    -----------
       Total..............................................     $866,615        $975,848     $1,307,681
                                                              =========       =========    ===========
</TABLE>

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 workover activity. Oil and gas activity is heavily
influenced by, among other factors, oil and gas prices worldwide. High levels of
drilling and well-remediation activity spur direct demand for the Company's
products and services used to drill and remediate oil and gas wells,
particularly in Tubular Services and Drilling Services. Additionally, high
levels of oil and gas activity increase cash flows for drilling contractors and
well-remediation oilfield service contractors to reinvest in capital equipment
which the Company sells through its Drilling Equipment Sales and Coiled Tubing &
Wireline Products groups.

       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 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 to maintain price stability
through voluntary production limits, the level of production by non-OPEC
countries and 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.

       Low petroleum prices adversely affected the Company's business in the
second half of 1998 and throughout 1999 as drilling and well remediation
activity declined. The Company's overall revenues grew in 1998, but declined
steadily through 1999 and 2000 as the Company completed orders for Drilling
Equipment Sales placed in 1997 and early 1998. Strengthening oil and gas prices
in late 1999 and 2000 led to recoveries in the Company's Tubular Services and
Drilling Services groups as drilling and well remediation activity rose during
the period. Drilling Equipment Sales and Coiled Tubing & Wireline Products
revenues began to rise in late 2000 as drilling contractors and well service
companies began to invest in new capital equipment following the resumption of
higher levels of oilfield activity in 2000.

The Drilling Process

       An oil or gas well is drilled by a bit attached to the end of the drill
stem which is made up of 30-foot lengths of drill pipe joined by threaded
connections known as "tool joints." Heavy drill collars at the bottom of the
drill stem put weight on the bit. Using the conventional rotary drilling method,
the drill stem is turned from the rotary table in the floor of the drilling rig
by torque applied to the "kelly" (a square or hexagonal section of pipe located
at the top of the drill stem) by means of the master bushing and kelly bushing.
During the drilling process heavy fluids ("drilling muds") are pumped down
through the drill stem and forced out through the bit. The drilling mud returns
to the surface through the hole area surrounding the drill stem, carrying with
it the cuttings drilled out by the bit. The cuttings are removed from the mud by
a solids control system which can include shakers, centrifuge and the like and
disposed of in an environmentally sound manner which may include drying and
injection either at the well site or an approved disposal site, and the mud is
continuously recirculated back into the hole. The drilling mud also serves to
contain pressure surges ("kicks") that may intrude into the formation. Wells may
be drilled to depths up to 30,000 feet. Consequently the integrity of the drill
pipe must be assessed. Additionally there can be a

                                       2
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multitude of corrosives both in the formation and in materials used in the
drilling process. Accordingly it can be incumbent upon the driller or operator
to protect its expensive drill string from such corrosives.

      As the hole depth increases, the kelly must be removed frequently so that
additional 30-foot sections of pipe can be added to the drill stem, which may
reach lengths in excess of five miles. When the bit becomes dull, the entire
drill stem is pulled out of the hole and disassembled, the disconnected sections
of pipe are set aside or "racked," the old bit is replaced and the drill stem
reassembled and lowered back into the hole (a process called "tripping"). During
drilling and tripping operations, tool joints must be screwed together and
tightened ("spun in" and "made up"), and loosened and unscrewed ("broken out"
and "spun out"). 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 cemented in place in order to protect against collapse and
contamination of the hole. Again, the integrity of the casing should be assessed
as well as analysing the need for corrosion control and/or hydraulic
improvement. Methods of pipe inspection and various tubular coatings and liners
are available for these purposes.

      The raising and lowering of the drill stem while drilling or tripping, and
the lowering of casing into the well bore, are accomplished with the rig's
hoisting system. A conventional hoisting system is a block and tackle mechanism
and the derrick must have sufficient structural integrity to support the entire
weight of the drill stem or casing string.

      During the drilling process it is possible for formation fluids, such as
natural gas, water or oil, to get into the wellbore creating additional pressure
which, if not controlled, could lead to a "blowout" of the well. To prevent
blowouts, a series of high-pressure valves known as blowout preventers ("BOPs")
are positioned at the top of the well and, when activated, form pressure tight
seals which prevent the escape of fluids. When closed, conventional BOPs prevent
normal rig operations and are activated only if drilling mud and normal well
control procedures cannot safely contain the pressure. BOPs must be designed to
contain pressure of up to 15,000 psi.

      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." A
producing well may undergo workover procedures to extend its life and increase
its production rate. Frequently the use of coiled tubing and coiled tubing units
which are similar to workover rigs, is necessistated either by the
particularities of the well or by economic considerations.

Drilling Equipment Sales Group


      The Company intends to continue Varco's long tradition of pioneering
innovations such as the top drive and automatic pipe handling systems which
improve the efficiency, safety, cost, and environmental impact of drilling
operations. The Drilling Equipment Sales group designs, manufactures and sells a
wide variety of top drives, automated pipe racking systems, motion compensation
systems, rig controls, blow-out preventors, handling tools, drawworks, risers,
rotary tables, and other drilling equipment for both the onshore and offshore
markets, and is a leader in the development of innovative drilling systems.
Based on its supply of drilling equipment for most of the newly-constructed
harsh environment offshore drilling rigs over the past few years, the Company
believes it is the worldwide market leader in several of these product
categories. The Drilling Equipment Sales group sells directly to drilling
contractors and oil companies. Demand for its products is strongly dependent
upon capital spending plans by oil and gas companies and drilling contractors.


      Top Drives. The Top Drive Drilling System ("TDS") originally introduced
by Varco in 1982, significantly alters the traditional drilling process. Using
the TDS, the drill stem is rotated from its top by means of a large electric
motor. This motor is affixed to rails installed in the derrick and traverses
from near the top of the derrick to the rig floor as the drill stem penetrates
the earth. Therefore, the TDS eliminates the use of the rotary table for
drilling. Components of the TDS also are used to connect additional lengths of
pipe to the drill stem during drilling operations.

      The TDS combines elements of pipe handling tools, as well as hoisting and
rotary equipment, in a single system. Torque to turn the drill stem is imparted
directly by means of a large electric motor which moves up and down along rails
installed in the derrick and into which the drill stem is connected. During
drilling operations,

                                       3
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elements of the TDS perform functions such as spinning-in and making-up tool
joints. It also incorporates a drill pipe elevator, providing the capability to
maneuver a stand of pipe into position to be added to the drill string when
drilling, or to hold and hoist the entire drill stem. Drilling with a TDS System
provides several advantages over conventional drilling. It enables drilling with
three lengths of drill pipe, 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
the vertical) by providing the ability to rotate the pipe as it is removed from,
or replaced into, the hole, thus reducing friction and the incidence of pipe
sticking. The TDS also increases the safety of drilling operations.

       The TDS has demonstrated substantial economic advantages. Users of the
system generally report reductions in drilling time ranging from 20% to 40%. By
facilitating extended reach drilling, the TDS increases the area which can be
drilled from a given location, such as a fixed platform or man-made island.
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.

       The TDS has evolved continuously since its initial introduction. Today,
the Company's top drive product line includes several models, each designed to
satisfy specific customer requirements. Following the 1982 introduction of the
initial version, the TDS-3, Varco introduced the TDS-4 in 1990 which offered
operators the capability of optimizing speed and torque for differing drilling
conditions. The TDS-6S, first delivered in 1991, featured a dual motor which
doubled the power and torque of a single motor unit. Introduced in 1993 the TDS-
7S featured an alternating current ("AC") motor instead of the direct current
("DC") motor used on previous models. In 1997 the TDS-8S added AC power to the
Company's most popular top drive, the TDS-4S. The AC system offers lower
maintenance cost, as well as providing higher torque for longer periods and a
running speed more than twice that of conventional DC motor powered systems.

       The TDS-9S top drive was introduced in 1995. It is powered by dual AC
motors, is reduced in length and rides on a separately installed torque tube.
For these reasons it is especially well suited for sale or rental to the
conventional land rig market, where portability is critical. The TDS-9S is
designed for ease of installation in existing derricks, can be rigged up and
rigged down in a matter of hours, and is easily transported from one location to
another. During 1997 the TDS-10S was introduced. The TDS-10S is a smaller
version of the TDS-9S designed for use in a variety of smaller land and workover
rig applications. The TDS-10S has a 250-ton hoisting capacity as compared to the
400-ton hoisting capacity of the TDS-9S. In 1998 a higher hoisting capacity AC
powered Top Drive was introduced, the TDS-11S. The TDS-11S has a hoisting
capacity of 500 tons.

       Pipe Racking Systems. Pipe racking systems are used to handle drill pipe,
casing and other types of pipe (collectively "tubulars") 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 it up to the rig floor and raise it to a vertical
position from which it may be passed to a vertical racking system.

       Mechanical vertical pipe racking systems reduce, but do not eliminate,
the manual effort involved in pipe handling. The Pipe Handling Machine ("PHM"),
introduced by Varco in 1985, provides a fully automated mechanism for handling
and racking of drill pipe and drill collars during drilling and tripping
operations. It incorporates the spinning and torquing functions of the Automated
Roughneck with the automatic hoisting and racking of disconnected sections of
pipe. These functions are integrated via computer controlled sequencing, and the
Pipe Handling Machine is operated by a person in an environmentally secure
cabin.

       The Automated Roughneck is an automated version of the Iron Roughneck(R),
which was originally introduced by Varco in 1976. It is a microprocessor
controlled device which automatically performs the torquing and spinning
functions required to connect and disconnect sections of drill pipe during
drilling and tripping operations, as well as during the setting of casing.

       The Pipe Racking System ("PRS") is a semi-automated vertical pipe racking
system which has evolved from the "Star" system to which Varco acquired the
rights in 1990. When used in conjunction with an Automated Roughneck, it
provides an alternative to the more fully automated PHM. Like the PHM, it is
operated remotely from the driller's cabin by a single operator, but it requires
more operator intervention. Its design makes it more

                                       4
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easily adapted to a land rig or for retrofitting to an existing offshore rig.
The current version of the PRS was introduced in 1996.

       Vertical pipe racking systems are used predominantly on offshore rigs and
are virtually mandatory on floating rigs such as semisubmersibles. 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 the lowering of casing into the well bore. During 1999, Varco
introduced its first "Automated Hoisting System" ("AHS"), which uses an AC-
powered motor and a braking system that offers precise proportional control. The
AHS automates the repetitive hoisting and drilling operations through 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 will deliver the first AHS in 2001.

       Blow-out Preventers. BOPs are devices used to seal the space between the
drill string and the borehole to prevent an uncontrolled flow of formation
fluids and gases. The Drilling Equipment Sales group manufactures three types of
BOPs under the Shaffer brandname. Ram and annular BOPs are back-up devices and
are activated only if other techniques for controlling pressure in the well bore
are inadequate. When closed, these devices prevent normal rig operations. Ram
BOPs seal the wellbore by hydraulically closing rams against each other across
the wellbore. Specially designed packers seal around specific sizes of pipe in
the wellbore, shear pipe in the wellbore or close off an open hole. Annular BOPs
seal the wellbore by hydraulically closing a rubber packing unit around the
drill pipe or kelly or by sealing against itself if nothing is in the hole. The
rotating BOP allows operators to drill or strip into or out of the well at low
pressures without interrupting normal operations.

       Varco expanded its BOP line in 1995 with the introduction of a system for
achieving Pressure Control While Drilling (PCWD(R)). This new BOP allows normal
drilling operations to proceed while controlling pressures up to 2,000 psi, and
will operate 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 weight and space savings. Its unique features make subsea
operation more efficient through faster ram configuration changes without
tripping the stack.

       The Company sells conventional BOP control systems under the registered
trademark Koomey(R). The Koomey 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 Generation MUX, an electronic control system
designed specifically for deep-water applications.

       Drilling Risers. Riser is large diameter pipe which, when drilling from a
floating rig such as a semisubmersible or drillship, connects the rig to the
well on the ocean floor. Therefore, the riser string, which consists of sections
approximately 75 feet in length connected together, may extend to as much as
10,000 feet. The Drilling Equipment Sales group purchases the blank pipe,
manufactures and attaches connectors to each section, and completes the riser
with the attachment of related components.

       Motion Compensation Systems. The Drilling Equipment Sales group sells
motion compensation equipment under the registered trademark Rucker(R). 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. This group also manufactures tensioners, which provide continuous
reliable axial tension to the marine riser pipe and guide lines on floating
drilling rigs, tension leg platforms and jack-up rigs. An important product
extension in 1996 was the Riser Recoil System, which provides a safe disconnect
when the floating rig encounters an unanticipated need to leave location.

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       Pipe Handling Tools. The Company's pipe handling tools are designed to
enhance the safety, efficiency and reliability of pipe handling operations. Many
of these tools have provided innovative methods of performing the designated
task through mechanization of functions previously performed manually. The
Drilling Equipment Sales group manufactures various tools used in the making up
and breaking out of drill pipe, including spinning wrenches, manual tongs,
torque wrenches and kelly spinners. The spinning wrench is a tool used to screw
together and unscrew sections of drill pipe. Powered pneumatically or
hydraulically, it replaces a hazardous device known as a spinning chain. Manual
tongs are used to make up or break out tool joints, while the torque wrench is a
hydraulically powered device which performs this function with enhanced safety
and precision. The kelly spinner is a pneumatically or hydraulically powered
tool used to connect and disconnect the kelly to and from the drill stem as
additional lengths of pipe are added while drilling.

       The Drilling Equipment Sales group also manufactures other tools used in
various pipe handling functions. Slips are gripping devices which hold pipe or
casing in suspension while in the hole, and they may be either manual, spring or
hydraulically operated. 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.

       When drilling, tripping or setting casing, lengths of pipe must be
hoisted into position above the hole, lowered into or lifted from the hole and
held in suspension while in the hole. Hoisting equipment includes devices used
to grip and hold various types of pipe ("tubulars") while being raised or
lowered. Drill pipe elevators are used to hold lengths of drill pipe as they are
hoisted into position to be attached to the drill stem, and to hold the entire
drill stem as it is lowered into or lifted from the hole. Similarly, casing
elevators and spiders are gripping devices used to hold the casing as additional
lengths are added and lowered into the hole. Links are elongated steel forgings
from which the elevator is suspended and which, in turn, hangs from beneath the
hook, which is connected to the hoisting mechanism of the drilling rig. The
Drilling Equipment Sales group manufactures elevators to accommodate a variety
of tubulars, as well as a complete line of links and hooks, together with casing
elevators and spiders, to handle a variety of casing sizes and accommodate
casing weighing up to 1,000 tons.

       Varco expanded its casing spider line in 1994 with the introduction of
the Flush Mounted Spider ("FMS 375"). It is designed to improve safety and
efficiency during casing operations by eliminating scaffolding which otherwise
must be used as a raised work platform for the rig crew.

       During 1996, Varco introduced the BX Hydraulic Elevator and the PS 21 and
PS 30 Hydraulic Power Slips. The BX Hydraulic Elevator increases safety and
eliminates the normal rig complement of several different types and sizes of
elevators through the use of removable bushings. The PS 21 and PS 30 Power Slips
improve both safety and rig efficiency by permitting the handling of all sizes
and types of tubulars with a single tool and by incorporating the FMS concept.

       Rotary Equipment. Rotary equipment products consist of kelly bushings and
master bushings. The kelly bushing applies torque to the kelly to rotate the
drill stem and fits in the master bushing which is turned by the rotary table on
the floor of the rig. The Drilling Equipment Sales group produces kelly bushings
and master bushings for most sizes of kellys and makes of rotary tables.

       In 1998, Varco introduced the Rotary Support Table for use on rigs with
Top Drive Drilling Systems. The Rotary Support Table is used in concert with the
TDS to completely eliminate the need for the larger conventional rotary table.

       Rig Controls. Drilling consoles, and recently, the V-ICIS, are typically
sold as original equipment to the rig manufacturer. However, electronic drilling
consoles may be sold as upgrades to existing rigs. In the United States and
Canada, most other instrumentation products are 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.

       A significant portion of the sales of Drilling Equipment Sales is in
spare and replacement parts. The Company conducts Drilling Equipment
manufacturing operations at facilities across North America and Europe, and
maintains sales and service offices in most major oilfield markets. The Company
expanded its market presence in Norway when it acquired its agent, Scana IOS
Desco AS, in December 2000.

                                       6
<PAGE>

       The products of the Drilling Equipment Sales group are sold in highly
competitive markets and its sales and earnings can be affected by competitive
actions such as price changes, new product development or improved availability
and delivery. The group's primary competitors are Hydralift AS, a Norwegian
company, National-Oilwell, Inc., Cooper Cameron Corporation, Hydril Company,
Stewart and Stevenson Service, Inc., DenCon Oil Tools and Weatherford
International, Inc. Other competitors include Aker Maritime AS, a Norwegian
company, Tesco Corporation, a Canadian company, and Canrig, a division of Nabors
Industries.

Tubular Services Group

       The Company is a leading provider of a variety of tubular services to oil
and gas producers, drilling contractors, well-remediation contractors, pipeline
operators, and tubular manufacturers and distributors. The Tubular Services
group provides tubular inspection services for drillpipe, casing, production
tubing, and line pipe at drilling and workover rig locations, at pipe yards
owned by its customers, at steel mills and processing facilities manufacturing
tubular goods, and at facilities which it owns. This group also provides for the
internal coating of tubular goods at eleven plants worldwide, including a plant
opened in Navasota, Texas in 1998, and through licensees in certain locations.
The Company believes it is the leading provider of oil country tubular goods
inspection and internal tubular coating services worldwide. Additionally, the
Company designs, manufactures and sells high pressure fiberglass tubulars for
use in corrosive applications. The Tubular Services group also provides in-place
inspection of oil, gas and product transmission pipelines through its
application of free-swimming instrumented survey tools ("smart pigs") which it
engineers, manufactures and operates.

       The Company's customers rely on tubular inspection services to avoid
failure of in-service tubing, casing, flowlines, pipelines and drillpipe. Such
tubular failures are expensive and in some cases catastrophic. The Company's
customers rely on internal coatings of tubular goods to prolong the useful lives
of tubulars and to increase the volumetric throughput of in-service tubular
goods. The Company's customers sometimes use fiberglass tubulars in lieu of
conventional steel tubulars, due to the corrosion-resistant properties of
fiberglass. Tubular inspection and coating services, and fiberglass tubulars,
are used most frequently in operations in high-temperature, deep, corrosive oil
and gas environments. In selecting a provider of tubular inspection and tubular
coating services, oil and gas operators consider such factors as reputation,
experience, technology of products offered, reliability and price. Following its
December 2000 acquisition of the assets of Smith Fiberglass Products, the
Company believes it is now the largest provider of fiberglass tubulars to
oilfield applications worldwide.

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

       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(R)-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.

       In 1997, the Company acquired Fiber Glass Systems, a leading provider of
high pressure fiberglass tubulars used in oilfield applications, for a
combination of stock and cash. Fiber Glass Systems has manufactured fiberglass
pipe since 1968 under the name "Star(R)," and was the first manufacturer of
high-pressure fiberglass pipe to be licensed by the API in 1992. The Company
acquired two fiberglass tubing manufacturing facilities in the U.S. and one in
China from A.O. Smith in December 2000, which significantly expanded its
manufacturing capabilities and product lines. Like coated tubulars, fiberglass
pipe is used to guard against corrosive fluids produced in the oilfield.

                                       7
<PAGE>

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

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

       In 1998, the Company acquired three tubular services businesses to
enhance its competitive positions in Norway, Egypt, and the west coast of the
United States. Additionally, these acquisitions provided opportunities to
achieve consolidation cost savings. In 1999, the Company completed acquisitions
of Geo-Ray Oilfield Inspections Ltd. in Canada, and the tubular services
business of AGR Services AS in Floro, Norway.

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

       The Company has pioneered many tubular inspection technologies used in
the oilfield, and continues to expand its product offering through innovation
and acquisition. In 1996, the Company installed its first proprietary high-speed
full-body ultrasonic tubular inspection unit (Truscope(R)). The new service
provides 100% ultrasonic coverage of tubulars at a rate of up to 200 feet per
minute. In 1997, the Company began offering a proprietary, patented external
tubular connection integrity test, the ISO-Gator (TM), 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(R).

       Mill Systems and Sales. The Company engineers and fabricates inspection
equipment for steel mills, which it sells and leases. The equipment is operated
by the steel mills and is used for quality control purposes to detect
transverse, longitudinal and three-dimensional defects in the pipe during the
high-speed manufacturing process. Each piece of mill inspection equipment is
designed to customer specifications and is installed and serviced by the
Company. Since 1962, the Company has installed more than 80 units worldwide, in
most major steel mills. Equipment is manufactured at the Company's Houston,
Texas facility. In 1996, the Company moved its NDT division manufacturing
facilities from Midland, Texas to Houston to improve overall manufacturing
efficiency and reduce the cost of manufacturing products. Revenue for Mill
Systems and Sales fluctuates significantly from year to year due to the timing
of negotiating large domestic and export sales contracts, arranging financing
and manufacturing equipment.

       The Tubular Services group also provides industrial inspection and
monitoring services for the construction, operation and maintenance of major
projects in energy-related industries. Inspection techniques include the x-
raying of pipeline girth welds and ultrasonic or eddy current inspection of
refinery equipment. Monitoring services include various quality assurance and
control and supervision services. Most of these services are provided during
fabrication, installation and maintenance of energy-related facilities. The
primary customers are power plants undergoing construction or maintenance,
chemical and petrochemical plants, pipeline construction companies and pipeline
owners.

       Pipeline Inspection. In-place inspection services for oil and gas
pipelines identify anomalies in the pipelines without removing or dismantling
the pipelines or disrupting the product flow, giving customers a convenient and

                                       8
<PAGE>

cost-effective method of identifying potential defects in pipelines. The Tubular
Services group inspects pipelines by launching a sophisticated survey instrument
into the pipeline. Propelled by the product flow, the instrument uses
electromagnetics, ultrasonics, and mechanical measurements received on digital
and analog media to monitor the severity and location of internal and external
pitting-type corrosion as well as 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 affects funds available for discretionary
pipeline inspection and maintenance expenditures by many pipeline operators.
This dependence is most pronounced in international markets. Additionally,
significant consolidation in the pipeline industry has caused many pipeline
operators to defer inspections in recent years as they re-evaluate their
pipeline maintenance programs following mergers and acquisitions. Management
believes there are growth opportunities for the Company's Pipeline Services due
to the aging of the worldwide pipeline network, and construction of new
pipelines. U.S. regulatory inspection requirements and an extensive pipeline
infrastructure in Eastern Europe are additional industry factors expected to
contribute to the growth of the Company's Pipeline Services. Catastrophic
pipeline failures in the U.S. in recent years have prompted regulators to
examine more stringent pipeline inspection requirements for pipeline operators,
which would increase the demand for the Tubular Services group pipeline
inspection services. However, there can be no assurance that such measures will
be enacted. Additionally, management believes that the Company's new digital
TruRes(R) inspection technology and other new software and survey products will
provide growth opportunities. The TruRes(R) technology applies advanced digital
computer technology and other advancements within the body of the inspection
tool to provide greater measurement sampling density and pipe-body coverage.

       The Tubular Services group's customers include almost all major oil and
gas companies, large and small independent producers, national oil companies,
drilling contractors, oilfield supply stores, pipeline operators and steel
mills. No single customer accounted for more than 10% of the Company's revenue
in 2000. The Company's competitors in Tubular Services include, among others,
ICO Inc., Ameron, Pipeline Integrity International, and Shaw Industries. 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. In tubular coating, 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.

Drilling Services Group

       The Company's Drilling Services group is engaged in the provision of
highly-engineered equipment, products and services which separate and manage
drill cuttings produced by the drilling process ("Solids Control Services").
Drill cuttings are usually contaminated with petroleum or drilling fluids, and
must be disposed of in an environmentally sound manner. Additionally, efficient
separation of drill cuttings enhances the drilling effectiveness of the drilling
fluids for re-use. Under its brand names Brandt(R) and Brandt Rigtech, the
Company believes it is the market leader in the provision of solids control
services to the oil and gas drilling industry worldwide. The Drilling Services
group also rents and sells proprietary drilling rig instrumentation packages
which monitor various processes throughout the drilling operation, under the
name MD/Totco. The group's rig instrumentation packages collect and analyze data
through both analog and digital media, enabling rig personnel to maintain safe
and efficient drilling operations. The Company believes it is the largest
provider of drilling rig instrumentation packages worldwide.

       Solids Control. The Drilling Services Group uses a variety of
technologies to separate drill cuttings from drilling fluid, and to further
transport, dry and refine drill cuttings for safe disposal. The Company believes
the regulatory and industry trend towards minimizing the environmental impact of
drilling operations in a number of environmentally sensitive oil and gas
productive regions will lead to greater demand for highly engineered solids
control products and closed loop drilling systems. The Company further believes
the trend towards more technically complex drilling, including highly deviated
directional wells and slim-hole completions, will favorably impact the demand
for solid controls technology because of its ability to reduce costly downhole
problems. As

                                       9
<PAGE>

environmental constraints are increased and as awareness of environmental
protection grows, the Company believes that its drill cuttings and treating
processes (thermal, cuttings reinjection, etc.) will result in increased demand
for these products.

       The Company has a history of introducing new solids control products and
services obtained both through its internal development and through acquiring or
licensing technologies from others. The Company acquired the Gumbo Chain from
Nu-Tec, Inc. in 1997, a product to remove sticky shale or "gumbo," which is
encountered in certain geologic environments, from drilling fluid. In 1998, the
Company initiated operations with a unit which removes hydrocarbons from drill
cuttings using heat. The processed cuttings are rendered inert and can be
disposed of with minimal environmental impact. The Company commenced operation
of a second drill cuttings thermal desorption unit in the first quarter of 1999.
The Company also introduced its new Cobra(TM) shale shaker in 1998. The
Cobra(TM) has a small footprint and a lightweight design, and is priced to
compete in the more price-sensitive segment of the market. Several other
versions of this shaker were introduced during 1999, along with new screens to
increase the efficiency of the shaker. The Company acquired two businesses,
Baytron Inc. and M.S.D. Inc., in 1998 in order to enhance its rig
instrumentation, cuttings slurrification and injection capabilities,
respectively, and to achieve consolidation savings. In 1999, the Company
acquired Manufacturas Rowi, C.A. (Rowica), a Venezuelan solids control company,
and the solids control assets of Newpark Resources, Inc. In early 2001 the
Company acquired certain assets of Angelle Construction, Inc. to enhance its
cuttings transport technologies.

       The Drilling Services group manufactures conventional and linear motion
shale shakers, high speed and conventional centrifuges, desanders, desilters,
screens, degassers and closed loop drilling fluids systems at its facilities in
Conroe, Texas; Houston, Texas; and Aberdeen, United Kingdom. The group markets
solids control equipment under the Brandt(R), Brandt Rigtech, and various other
brand names. For the year ended December 31, 2000, approximately 40% of the
Drilling Services group's solids control equipment revenue was generated from
the sale of solids control equipment and inventory, and approximately 60% of
such revenue was generated from rentals and services.

       The Company has entered into an alliance agreement with Newpark
Resources, Inc. ("Newpark") under which the Company will be, subject to certain
conditions, the exclusive provider of Solids Control Products and Services to
Newpark in the United States. The alliance agreement further provides that
Newpark will be, subject to certain conditions, the exclusive provider of
oilfield waste services to the Company in the Gulf Coast market.

       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 the rig safety and
efficiency. Systems are typically comprised of several sensors placed
throughout the rig to measure parameters such as weight on bit, hookload,
standpipe pressures, mud pump strokes, drilling mud levels, torque, and others,
all networked back to a central command station for review, recording and
interpretation. Additionally the rig instrumentation packages typically provide
multiple CRT screens around the rig for various rig personnel to perform
individual jobs more effectively, and cameras for certain areas to permit remote
monitoring. The Company offers proprietary touch-screen displays, interpretive
software, and data archival and retrieval capabilties. In 1999, the Company
introduced its RigSense (TM) product, which combined leading hardware and
software technologies into an integrated drilling rig package. It recently
completed a successful test to permit access of drilling data from offsite
locations, which will enable company personnel to monitor drilling operations
from an office environment, through a secure link.

       The group's customers for Drilling Services include almost all major oil
and gas companies, large and small independent producers, national oil
companies, and drilling contractors. No single customer accounted for more than
10% of the Company's revenue in 2000. Competitors in Drilling Services include
Smith International ("SWACO"); Derrick Manufacturing Corp.; Oil Tools Pte. Ltd;
National Oilwell; Petron Industries, Inc.; Epoh, a division of Nabors
Industries; Pason Systems, Inc., a Canadian company 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.

                                       10
<PAGE>

Coiled Tubing & Wireline Products Group

       The Company's Coiled Tubing & Wireline Products group sells capital
equipment and consumables to most of the major oilfield coiled tubing and
wireline remediation and drilling service providers. The Company believes it is
the world's leading designer and manufacturer of coiled tubing units, coiled
tubing and wireline pressure control equipment, and wireline units used in oil
and gas well remediation, completion and drilling operations. 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. The Company believes it is the second largest producer of coiled
tubing worldwide. Demand for the group's Coiled Tubing & Wireline Products is
strongly dependent upon the capital spending plans of coiled tubing and wireline
service companies, and the general level of well remediation activity.

       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 well bore at a high rate of
speed by a hydraulically operated coiled tubing unit. A coiled tubing unit is
typically mounted on a truck or skid and consists of a hydraulically operated
tubing reel or drum, an injector head which pushes or pulls the tubing in or out
of the well bore, and various power and control systems. Coiled tubing is
typically used with sophisticated pressure control equipment which permits the
operator to continue to safely produce the well. The Coiled Tubing and 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 drillpipe and workover pipe. Coiled
tubing allows faster "tripping," since the coiled tubing can be reeled very
quickly on and off a drum and in and out of a well bore. In addition, the small
size of the coiled tubing unit compared to an average workover rig reduces
preparation time at the well site. Coiled tubing permits a variety of workover
and other operations to be performed without having to pull the existing
production tubing from the well and allows ease of operation in horizontal 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 well is "shut in."

       Currently, most coiled tubing units are used in well remediation and
completion applications. The Company believes that advances in the manufacturing
process of coiled tubing, tubing fatigue protection and the capability to
manufacture larger diameter and increased wall thickness coiled tubing strings
have resulted in increased uses and applications for coiled tubing products. For
example, 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 wall becomes too great or if the tube becomes
inhibited by some obstacle or irregularity in the well bore. Buckling has not
proven to be a significant obstacle in most well remediation applications, and
the Company believes it will become less of an issue as the result of the
availability of stronger and larger diameter coiled tubing.

       Generally, the Coiled Tubing and 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 and wireline
pressure control equipment, wireline units, pressure pumping equipment, snubbing
units, nitrogen pumping equipment and cementing, stimulation, and blending
equipment. The group markets its coiled tubing equipment under the Hydra Rig(R)
brand name primarily to providers of coiled tubing drilling and workover
services. The Company's primary coiled tubing unit production facilities are
located at its Hydra Rig facility in Fort Worth, Texas. In addition, the group
markets coiled tubing pressure control equipment under the Texas Oil Tools(R)
brand name and manufactures this equipment at its facility in Conroe, Texas.

                                       11
<PAGE>

       Wireline Products. Through its 1996 acquisitions of SSR (International)
Ltd., and Pressure Control Engineering Ltd., and 1998 acquisition of Eastern Oil
Tools Pte. Ltd, the Company assembled a market-leading position in the wireline
unit and pressure control manufacturing business, expanded its offering of
downhole coiled tubing tools and added manufacturing facilities in Poole and
Aberdeen, in the United Kingdom; Perth, Australia; and Singapore. Additionally,
the Company began offering its "TEM(TM)" cementing equipment and fabricating
nitrogen pumping units in Tulsa, Oklahoma, in December 1997, when it acquired
Tulsa Equipment Manufacturing Company.

       The Company's acquisition of Eastern Oil Tools Pte. Ltd. in June, 1998
also added perforating guns to its offering of products. 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 has a history of engineering new technologies and products
for its Coiled Tubing & Wireline Products markets. It recently introduced the
DSH "Sidedoor" Stripper/Packer, which allows packer and bushing replacement
while the operator has coiled tubing in the wellbore, and the CT Slimhole BHA
Jetting Tool Assembly, a small diameter jetting tool which can traverse small
diameter well completion configurations. The Coiled Tubing & Wireline Product
group's coiled tubing product offering also includes sophisticated downhole
tools engineered to enable oil and gas producers to re-enter complex
multilateral wells, to install coiled tubing velocity strings, to bypass
electrical submersible pumps, and to perform a variety of other remediation and
completion activities utilizing coiled tubing. One such product, the MLR(TM)
system was awarded a Meritorious Award for Engineering Innovation at the 1996
Offshore Technology Conference in Houston, Texas.

       The Company's customers for Coiled Tubing and Wireline Products include
almost all major oil and gas coiled tubing service companies, as well as major
oil companies, national oil companies, and small independents. No single
customer accounted for more than 10% of the Company's revenue in 2000.
Competitors in Coiled Tubing & Pressure Control Products include Stewart &
Stevenson, Precision Tubing, Maritime Hydraulics, Elmar, ASEP, National Oilwell
and several smaller competitors.

2000 Acquisitions

       In 2000, the Company made the following acquisitions:

<TABLE>
<CAPTION>
                                                                                                                Date of
       Acquired Entity/Assets                                                   Product Line                    Acquisition
       ----------------------                                                   ------------                    -----------
       <S>                                                                      <C>                             <C>
       Magna-Sonic Stress Testers, Inc.                                         Tubular Services                April 2000
       Fiberglass pipe manufacturing assets of Smith Fiberglass Products        Tubular Services                December 2000
       Scana I.O.S. Desco AS                                                    Drilling Equipment Sales        December 2000
</TABLE>

Seasonal Nature of the Company's Business

       Historically, the level of the Company's business has followed some
seasonal trends, which are described below.

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

                                       12
<PAGE>

       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 resulted
in less opportunity to perform pipeline inspection during this time. During the
second quarter, activity has typically begun to increase and normally has
continued at relatively stable levels through the end of the year as operators
finished scheduled maintenance programs. Mill systems sales and industrial
inspection services have had no particular seasonal trend. The timing of mill
equipment sales is not easily predictable and, accordingly, revenue tends to
fluctuate from quarter to quarter.

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

       In general the Drilling Equipment Sales division has not experienced
significant seasonal fluctuation. There can be no guarantee that seasonal
effects will not influence future drilling equipment sales.

       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 49 countries.

       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, such as the Automated Roughneck, Top Drive Drilling
System, pipe racking systems, and pressure control and motion compensation
equipment, as well as the Varco integrated control and information systems
("V-ICIS"), represent significant capital expenditures and are usually sold
directly to an oil company, drilling contractor or rig builder. Other drilling
equipment products may be sold through supply stores or directly to
government-owned oil companies or drilling contractors.

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

       The Company's Drilling Services customers are predominantly major and
independent oil and gas companies, national oil companies and drilling
contractors. The Drilling Services group operates sales and distribution
facilities at strategic locations worldwide to service areas with high drilling
activity. The Company's worldwide Solids Control and Instrumentation sales
employees are complemented by service and engineering facilities which provide
specialty repair and maintenance services to customers.

       The Company's Coiled Tubing and Wireline Products are primarily sold
directly to end users through a worldwide Coiled Tubing and Wireline Products
sales organization. The Company also has in place certain exclusive alliances
with major oilfield service companies to provide pressure control equipment.

       The Company's foreign operations, which include significant operations in
Canada, Europe, the Far East, the Middle East and Latin America, are subject to
the risks normally associated with conducting business in foreign countries,
including uncertain political and economic environments, which may limit or
disrupt markets, restrict the movement of funds or result in the deprivation of
contract rights or the taking of property without fair

                                       13
<PAGE>

compensation. Government-owned petroleum companies located in some of the
countries in which the Company operates have adopted policies (or are subject to
governmental policies) giving preference to the purchase of goods and services
from companies that are majority-owned by local nationals. As a result of such
policies, the Company relies on joint ventures, license arrangements and other
business combinations with local nationals in these countries. In addition,
political considerations may disrupt the commercial relationship between the
Company and such government-owned petroleum companies. Although the Company has
not experienced any significant problems in foreign countries arising from
nationalistic policies, political instability, economic instability or currency
restrictions, there can be no assurance that such a problem will not arise in
the future. See Note 12 of the Notes to the Consolidated Financial Statements
for information regarding geographic revenue information.

Research and New Product Development and Intellectual Property

       The Company believes that it is a leader in the development of new
technology and equipment to enhance the safety and productivity of the drilling
process and that its sales and earnings have been dependent, in part, upon the
successful introduction of new or improved products. Additionally it believes
that the Company's strong market position in its major businesses is enhanced by
its leading technologies and reputation for innovation and expertise. Through
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, 2000, the Company held a substantial number of United
States patents and had patent applications pending. Expiration dates of such
patents range from 2001 to 2018. 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 Drilling Equipment group's
products generally consist of machining, welding and fabrication, heat treating,
assembly of manufactured and purchased components and testing. Drilling and
pressure control equipment products are 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. Automated
Roughnecks, Top Drive Drilling Systems, and pipehandling systems are
manufactured in Orange, California; pressure control and motion compensation
equipment, riser pipe and riser tensioners are manufactured at facilities in
Houston, Texas; and rotating and handling tools are manufactured at the
Company's facilities in Etten-Leur, the Netherlands, and Mexicali, Mexico.

       The Company's Drilling Services group manufactures or assembles the
equipment and products which it leases and sells to customers, and which it uses
in providing solids control. In addition to producing new solids control and
instrumentation equipment and products, Drilling Services also produces spare
parts for sale. Drilling Services manufactures screens used in its solids
control operations and for sale to others at its New Iberia, Louisiana; Conroe,
Texas; Leduc, Alberta; and Trinidad facilities; manufactures solids control
equipment at its facilities in Houston, Conroe, and Aberdeen; 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; Conroe, Texas; Evangeline, Louisiana; and Aberdeen, Scotland.
Fiber glass tubulars and fittings are manufactured at its San Antonio, Texas;
Big Spring, Texas; Little Rock, Arkansas; and Wichita,

                                       14
<PAGE>

Kansas facilities, while tubular coatings are manufactured in its Houston, Texas
facility, or through restricted sale agreements with third party manufacturers.

       The Coiled Tubing and Wireline Products group manufactures coiled tubing
units, wireline units, pressure pumping equipment and pressure control equipment
at its Fort Worth, Texas; Conroe, Texas; Tulsa, Oklahoma; 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.

                                       15
<PAGE>

Raw Materials

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

Backlog

       Sales of the Company's products are made on the basis of written purchase
orders or contracts and, consistent with industry practice, by telex, 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. However the Company, is generally entitled to cancellation fees for
expenses and costs incurred prior to the cancellation of orders. 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.

       The backlog of unshipped orders was approximately as follows on the dates
indicated (in thousands):

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                    2000          1999            1998
                                                                    ----          ----            ----
 <S>                                                              <C>           <C>             <C>
    Drilling Equipment Sales.............................         $ 88,055       $ 55,734       $336,961
    Coiled Tubing & Wireline Products....................         $ 61,200       $ 17,946       $ 39,068
                                                                  --------       --------       --------
       Total.............................................         $149,255       $ 73,680       $376,029
                                                                  --------       --------       --------
</TABLE>

       The Company expects that substantially all of the backlog will be shipped
by December 31, 2001.

Environmental Matters

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

       The Company's operations are subject to numerous local, state and federal
laws and regulations, including the regulations promulgated by the Occupational
Safety and Health Administration, the United States Environmental Protection
Agency, the Nuclear Regulatory Commission and the United States Department of
Transportation. Management believes that the Company is in substantial
compliance with these laws and regulations, and that the compliance and remedial
action costs associated with these laws and regulations have not had a material
adverse effect on its results of operations, financial condition or competitive
position, to date.

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

       Pursuant to an agreement executed as part of the acquisition of the
Company in 1988 from Minstar Inc. ("Minstar"), Minstar has agreed, subject to
certain limitations concerning the time for submitting claims and the amount of
losses to be covered as described below, to indemnify the Company with respect
to all losses, liabilities, damages and expenses incurred in connection with,
arising out of or resulting from the production, use, generation, emission,
storage, treatment, transportation, disposal or other handling or disposition or
migration of any kind of any toxic or hazardous wastes at any time prior to the
closing of the 1988 acquisition date. Claims for

                                       16
<PAGE>

indemnification were required to be made before May 13, 1992. Minstar is
obligated to indemnify the Company for the first $1 million of losses incurred
by the Company and fifty percent of losses in excess of $2 million. The Company
is solely responsible for the second $1 million of losses incurred and fifty
percent of losses in excess of $2 million. See "Item 3--Legal Proceedings" for a
description of the indemnity to be provided by Minstar with respect to actions,
suits, litigation, proceedings or governmental investigations which may also
apply to certain environmental matters.

Employees

       At December 31, 2000 the Company had a total of 6,660 employees (of which
782 were temporary employees). The Company considers its relations with its
employees to be excellent and has never suffered a work stoppage or interruption
due to a labor dispute.

                                       17
<PAGE>

ITEM 2. PROPERTIES

     The following is a description of the Company's major facilities:

<TABLE>
<CAPTION>
                                                                                   Size (Approximate
              Location                             Description                       Square Feet)        Owned/Leased
              --------                             -----------                       -----------         ------------
<S>                                   <C>                                        <C>                    <C>
North America:

U.S.:

Kenai, Alaska.......................  Inspection Facility (Lower Shop)           12,000 on 10 Acres      Owned

                                      Inspection Facility (Upper Shop)           14,400 on 11 Acres      Leased

North Slope (Deadhorse) Alaska......  Inspection, Repair & Service Center        18,400 on 5.25 Acres    Building Owned*

Little Rock, Arkansas...............  Fiberglass Tubular Manufacturing Plant,    262,784 on 44 Acres     Leased
                                      R&D Lab, Administrative Offices

                                      Fiberglass Tubular Manufacturing Plant     45,000                  Leased

                                      Fiberglass Tubular Manufacturing Plant     15,000                  Leased

Bakersfield, California.............  Downing St. Solids Control  Facility       7,200 on 6 Acres        Owned

                                      Downing Street Inspection & Storage        8,690 on 6.67 Acres     Leased

                                      Fairhaven Ave. Offices & Warehouse         13,400 on 5.14 Acres    Building Owned*

                                      Wear St. Inspection Reclamation Yard       5 Acres                 Leased

Orange, California..................  Administrative Offices - 743 N. Eckhoff    35,000                  Leased

                                      Manufacturing & Office Facility            126,000                 Owned
                                      759 N. Eckhoff

                                      Office Facility  - 721 N. Eckhoff          10,000                  Leased

Santa Paula, California.............  Inspection & Reclamation Facility          8,000 on 12 Acres       Owned

Wichita, Kansas.....................  Fiberglass Tubular Manufacturing Plant     129,746 on 15 Acres     Owned

Amelia, Louisiana...................  Coating Plant, Inspection & Storage        93,500  on 35 Acres     Building Owned*
                                      Facilities

Harvey, Louisiana...................  Coating Plant & Inspection Facility        53,000 on 7 Acres       Owned & Leased

Lafayette, Louisiana................  Highway 90 East Complex: Solids Control    12,075 on .98 Acres     Owned
                                      Service Facility, Warehouse &
                                      Administrative Offices

                                      Highway 90 East Complex:  Systems Service  13,450                  Leased
                                      Facility, Warehouse & Distribution Center

                                      Solids Control Office & Warehouse          20,000 on 2 Acres       Leased
                                      Facility

Lake Arthur, Louisiana..............  Solids Control Service & Rework Facility   7,800 on 5 Acres        Leased

Morgan City, Louisiana..............  Inspection Facility                        42,400 on 3 Acres       Building Owned*

New Iberia, Louisiana...............  Solids Control Manufacturing & Warehouse   25,500 on 3.4 Acres     Owned
                                      Facility

Hobbs, New Mexico...................  Inspection Facility                        7,866 on .31 Acres      Owned

Edmond, Oklahoma....................  Coating Plant                              40,000 on 19 Acres      Owned

Oklahoma City, Oklahoma.............  Inspection Facility                        6,000 on 5 Acres        Owned

Tulsa, Oklahoma.....................  Nitrogen Units & Pump Manufacturing        40,700 on 4.47 Acres    Leased
                                      Facility, Warehouse & Offices

Arlington, Texas....................  Fabrication Center                         28,975 on 1.6 Acres     Leased

Big Spring, Texas...................  Fiberglass Tubular Manufacturing Plant &   39,000 on 12 Acres      Owned
                                      Administrative Offices

Cedar Park, Texas...................  Manufacturing and Administrative Facility  205,000 on 40 Acres     Owned
</TABLE>

                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                                                       Size (Approximate
              Location                             Description                           Square Feet)        Owned/Leased
              --------                             -----------                           -----------         ------------
<S>                                    <C>                                           <C>                     <C>
Conroe, Texas.......................   Solids Control & Pressure Control             160,000 on 30.49 Acres    Owned
                                       Manufacturing Facility, Warehouse,
                                       Administrative & Sales Offices &
                                       Engineering Labs

Corpus Christi, Texas...............   Inspection Facility                           20,800 on 4 Acres         Owned

Fort Worth, Texas...................   Coiled Tubing Manufacturing Facility,         75,200 on 9.67 Acres      Owned
                                       Warehouse, Administrative & Sales Offices

Houston, Texas......................   Holmes Road Complex:                          300,000 on 50 Acres       Owned
                                       Manufacturing, Warehouse, Corporate
                                       Offices, Coating Manufacturing Plant &
                                       Pipeline Services

                                       Engineering/Technical Research Center         76,000 on 6 Acres         Owned

                                       Highway 90: Coating Plant                     83,000 on 43 Acres        Leased

                                       Shaffer, MDT, BJ, & Systems Facility          286,000 & 77,000 on       Owned
                                       12950 West Little York Sales/ Service/        34 Acres
                                       Repair/Manufacturing

                                       Sheldon Road Complex: Administrative          137,000 on 94 Acres       Land Owned**
                                       Offices, Inspection & Storage Facilities                                Building Leased

                                       SOS Inspection Facility                       32,000 on 31 Acres        Owned

                                       Brandt/Southwest Complex: Manufacturing &     40,700 on 4.47 Acres      Leased
                                       Remanufacturing Facility, Administrative &
                                       Sales Offices

                                       Hardy Road Complex: Inspection Facility,      19,734 on 14 Acres        Owned
                                       Manufacturing Warehouse, Administrative
                                       Offices & Engineering

                                       Solids Control Service & Rework Facility      16,875 on 1.2 Acres       Leased
                                       12249 FM 529

Midland, Texas......................   Coating Plant, Reclamation Facility &         87,000 on 25 Acres        Owned
                                       Technical Service Building

Navasota, Texas.....................   Coating Plant                                 65,000                    Building Owned*

Odessa, Texas.......................   Inspection Pipe Storage Yard & Ancillary      12,000 on 23.2 Acres      Leased
                                       Service Facility

                                       MDT Sales & Service Facility                  8,000 on 1.5 Acres        Owned

San Antonio, Texas..................   Fiberglass Tubular Manufacturing Plant,       76,529 on 19.57 Acres     Owned
                                       R & D Lab, Administrative Offices

Snyder, Texas.......................   Inspection Facility                           3,200 on .55 Acres        Owned

Casper, Wyoming.....................   Inspection Facility                           91,720 on 29 Acres        Owned

Evanston, Wyoming...................   Inspection Facility and Pipe Storage Yard     11,000 on 18 Acres        Building Owned*

Canada:

Bonnyville, Alberta.................   Solids Control & Pipe Reclamation Facility    13,500 on 3 Acres         Leased

Brooks, Alberta.....................   Inspection Reclamation Facility               8,000 on .25 Acres        Leased

Calgary, Alberta....................   Inspection Facility--Office & Warehouse       20,000 on .63 Acres       Owned

                                       Solids Control Sales Offices                  7,758 in office tower     Leased

Drayton Valley, Alberta.............  Inspection Office & Warehouse                  5,000 on 1 Acre           Leased
</TABLE>

                                       19
<PAGE>

<TABLE>
<CAPTION>
                                                                                   Size (Approximate
              Location                             Description                       Square Feet)        Owned/Leased
              --------                             -----------                       -----------         ------------
<S>                                   <C>                                        <C>                     <C>
Canada:  (Cont'd)

Grande Prairie, Alberta.............  Solids Control & Inspection Warehouse       5,800 on 1.5 Acres       Leased
                                      Facility

Leduc, Alberta......................  Solids Control Equipment Rental & Services  43,230 on 9.29 Acres     Owned
                                      Facility

                                      MDT, Shaffer & Systems Service &            22,094 on 6.79 Acres     Owned
                                      Warehouse Facility

                                      Inspection Facility                         10,000 on 11.8 Acres     Leased

Lloydminster, Alberta...............  Inspection Facility Office, Warehouse, &    8,750 on 10 Acres        Leased
                                      Yard

Nisku, Alberta......................  Coating Plant, Inspection Facility,         114,000 on 30 Acres      Owned

                                      Inspection Yard                             Bldg. under const.       Owned
                                                                                  on 22.23 Acres

                                      Pipeline Services & Pipe Storage Yard       11,500 on 2.8 Acres      Owned

                                      Shop & Maintenance, Administrative & Sales  10,000 on 2 Acres        Leased
                                      Offices

Provost, Alberta....................  Inspection, Cleaning, Threading Repair      8,750 on .18 Acres       Leased
                                      Facility

Red Deer, Alberta...................  Inspection Facility                         14,800 on 15 Acres       Leased

Slave Lake, Alberta.................  Inspection Warehouse                        2,000 on 1 Acre          Leased

Estevan, Saskatchewan...............  Solids Control Rental Facility              4,320 on 1.92 Acres      Leased


International:

Latin America:

Argentina:

Comodoro Rivadavi, Chubut State.....  Reclamation & Inspection Facility           18,800 on 1.6 Acres      Leased

Los Perales, Santa Cruz State.......  Tubing & Sucker Inspection Rod Yard         700 on 2.47 Acres        Leased

Plaza Huincul, Neuquen State........  Reclamation & Inspection Facility           2,000 on 2.3 Acres       Leased

Bolivia:

Santa Cruz de La Sierra,............  Pipe & Solids Control Yard, Warehouse,      18,000 on 1.72 Acres     Leased
   Andres Ibanez State                & Office

Colombia:

Neiva, Columbia.....................  Solids Control Yard & Warehouse             53,820                   Leased

Yopal, Colombia.....................  Solids Control Warehouse, Storage           68,890 on 3.75 Acres     Leased

Equador:

Coca................................  Solids Control Warehouse & Service Facility 6,500                    Leased

Coca................................  Inspection Office, Warehouse & Service      10,000                   Leased
                                      Facility

Quito...............................  Solids Control & Inspection Office          1,500                    Leased

Peru:

Iquitos, Maynas.....................  Solids Control Office & Warehouse           9,187                    Leased

Trinidad:

Couva, Trinidad.....................  Screens Manufacturing Facility              8,073 on .5 Acres        Leased

San Fernand, Trinidad...............  Solids Control Sales & Service Facility     7,000 on .28 Acres       Leased
</TABLE>

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                                   Size (Approximate
              Location                             Description                       Square Feet)        Owned/Leased
              --------                             -----------                       -----------         ------------
<S>                                     <C>                                       <C>                     <C>
Venezuela:

Anaco, Venezuela......................  Solids Control Facility                     1 Acre                Owned

                                        Inspection Facility                         600 on 2.5 Acres      Leased

Ciudad Ojeda, Venezuala...............  Solids Control Facility                     1.5 Acres             Leased

Ciudad Ojeda, Venezuela...............  Coiled Tubing Facility                      1 Acre                Leased

La Candelaria, Venezuela..............  Waste Management Facility                   14.8 Acres            Owned


La Canada, Venezuela..................  Undeveloped Land For Waste Management       27.9 Acres            Owned
                                        Facility

Maracaibo, Venezuela..................  Solids Control Facility                     25,000 on 1 Acre      Owned

Tia Juana, Venezuela..................  Inspection Facility                         1.5 Acres             Leased

Far East:

Australia:

Perth, Western Australia..............  Administrative Office/Manufacturing         20,552                Leased
                                        Facility

Perth, Western Australia..............  Coiled Tubing & Wireline Products           11,836                Leased
                                        Warehouse
China:

Harbin, People's Republic of China....  Fiberglass Tubular Manufacturing Plant      35,000                Leased

Singapore:

Singapore.............................  Systems Offices, Service &                                        Owned
                                        Distribution Facility

Jurong, Singapore.....................  Coating Plant & Inspection Facility         50,644 on 8 Acres     Building Owned*

Tuas, Singapore.......................  Coiled Tubing & Wireline Products           40,000 on 1.5 Acres   Building Owned*
                     Manufacturing & Administrative Facility

Europe:

France:

Berlaimont, France....................  Coating Plant                               44,000 on 16 Acres    Owned

Germany:

Celle, Germany........................  Inspection Facility, Administrative &       43,560 on 12 Acres    Building Owned*
                                        Engineering Offices

Gladbeck, Germany.....................  Coating Plant                               25,635 on 4 Acres     Owned

Netherlands:

Coevorden, Netherlands................  Inspection Reclamation & Repair Facility    53,361 on 2 Acres     Leased

Etten-Leur, The Netherlands...........  BJ Mfg. Plant/Sales                         75,000 on 6 Acres     Owned

Norway:

Agotnes...............................  Inspection/Cleaning Hall                    7,000 on 1 Acre       Building Owned*

Floro.................................  Inspection/Cleaning Hall                    10,000 on 1 Acre      Building Owned*
</TABLE>

                                       21
<PAGE>

<TABLE>
<CAPTION>
                                                                                   Size (Approximate
               Location                               Description                     Square Feet)        Owned/Leased
               --------                               -----------                     ------------        ------------
<S>                                                   <C>                         <C>                   <C>
United Kingdom:

Bordon, England.......................  Pipeline Services Center                  12,000 on .75 Acres   Building Owned*

Dorset, England.......................  Coiled Tubing & Pressure Control          12,700 on .33 Acres   Leased
                                        Manufacturing, Administrative & Sales

Martham, England......................  Coiled Tubing & Nitrogen Units            10,000 on .46 Acres   Leased
                                        Manufacturing, Administrative & Sales

Aberdeen, Scotland....................  Inspection Facility, Coating Plant,       45,209 on 10 Acres    Owned
                                        Manufacturing, Administrative & Sales

                                        Solids Control Manufacturing Facility     58,800 on 6.25 Acres  Leased
                                        Assembly, Administrative, Sales

                                        Coiled Tubing & Pressure Control          26,000 on 1.65 Acres  Owned
                                        Manufacturing, Administrative & Sales

Badentoy, Scotland....................  Systems & Shaffer Sales, Service          63,000 on 6 Acres     Owned
                                        & Distribution Facility

Montrose, Scotland....................  Forties Road Systems Service Center &     34,000 on 3 Acres     Owned
                                        Office Facility
Middle East:

Saudi Arabia:

Al Khobar, Saudi Arabia...............  Reclamation, Inspection Facility &        340,203 on 8 Acres    Leased
                                        Offices
</TABLE>

_______________________

*    Building owned subject to a ground lease.

**   Land leased to building owner under a 99 year lease.

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


ITEM 3. LEGAL PROCEEDINGS

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

       The Company is involved in numerous legal proceedings which arise in the
ordinary course of its business. A description of certain of these proceedings
follows. The Company is unable to predict the outcome of these proceedings;
however, except as specifically set forth below, management believes that none
of these legal proceedings will have a material adverse effect on the results of
operations or financial condition of the Company. Notwithstanding the foregoing,
there can be no absolute assurance that the indemnity from Minstar discussed

                                       22
<PAGE>

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 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.

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

       The Company is a defendant in a litigation styled Derrick Manufacturing
Corporation vs. Advanced Wirecloth, Inc., Environmental Procedures, Inc. dba
SWECO Oilfield Services et al. (Civil Action No. 942417) in the United States
District Court for the Southern District of Texas, Houston Division, which is a
consolidated action with Civil Action No. 95-3653. The plaintiff in this action
asserts a number of claims related to the company's screen manufacturing and
solids control business including, among other things (1) infringement of United
States Patent Nos. 4,575,421, 5,417,858, 5,417,859, 5,720,881 and 5,783,077, (2)
trademark infringement, (3) unfair competition, (4) false patent marking of
products, (5) false advertising under Section 43(a) of the Lanham Act, and (6)
violation of Texas' Anti-Dilution Act. Discovery is currently scheduled to be
completed by April 9, 2001 with a trial to commence or be set on May 7, 2001.
Plaintiff has asked for an unspecified amount of damages arising from its claims
as well as a temporary and permanent injunction. The federal patent and
trademark laws allow the plaintiff to seek an award of its attorney fees, costs
and pre-judgment interest if it is successful and to seek a trebling of its
actual damages if there is a finding of willful infringement. The Company
believes that it has meritorious defenses to the plaintiff's claims and is
contesting the action vigorously. However, it is impossible to predict the
outcome of litigation and the Company's defense may be unsuccessful as to one or
more of the plaintiff's claims. If the plaintiff is successful in obtaining
damages or injunctive relief from this action, such damages or injunctive relief
could have a material adverse effect on the Company's results of operations or
financial condition. The Company believes that is has indemnity coverage from
certain of its insurance carriers for certain of the alleged claims. The Company
also believes its cost of defending this action are covered by insurance.
However, this suit is the subject of reservation of rights by certain carriers
and coverage could be contested by carriers providing such insurance.

                                       23
<PAGE>

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 2000.

                                    PART II

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

     The Company's common stock is traded on the New York Stock Exchange
(NYSE) under the symbol "VRC". The following table sets forth, for the calendar
periods indicated, the range of high and low closing prices for the common
stock, as reported by the NYSE:
                                           2000                      1999
                                           ----                      ----
                                      High        Low         High       Low
                                      ----        ---         ----       ---

        1st Quarter...........        $19 5/9  $ 12 1/2     $ 11 7/16   $ 5 1/8
        2nd Quarter...........         24 7/8    14 1/5       14 13/16    7 7/8
        3rd Quarter...........         22 19/20  17           16 7/16    12 7/16
        4th Quarter...........         21 3/4    15 1/3       16 3/8     10 7/8

     The closing price of the Company's common stock on February 28, 2001 was
$22.43. The approximate number of stockholders of record on February 28, 2001
was 1,270.

     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 therefor. 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.

                                       24
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                                               Years Ended December 31,
                                                            --------------------------------------------------------------
                                                               2000          1999        1998         1997       1996
                                                               ----          ----        ----         ----       ----
                                                                (Dollars in thousands, except ratio and per share data)
<S>                                                         <C>          <C>          <C>           <C>            <C>
Statement of Income Data:
Revenue................................................    $  866,615   $  975,848    $1,307,681    $1,070,318    $  744,011
Operating profit (1)...................................        60,911       67,348       179,062       180,412        23,563
Net income (loss)......................................    $   21,055   $   29,809    $  102,283    $  102,979    $  (25,057)
                                                           ==========   ==========    ==========    ==========    ==========
Basic earnings (loss) per common share.................    $     0.23   $     0.33    $     1.13    $     1.16    $    (0.31)
                                                           ==========   ==========    ==========    ==========    ==========
Dilutive earnings (loss) per common share..............    $     0.22   $     0.32    $     1.09    $     1.10    $    (0.31)
                                                           ==========   ==========    ==========    ==========    ==========
Other Data:
EBITDA(2)..............................................    $  144,217   $  134,016    $  239,685    $  222,865    $  132,168
Earnings (loss) per common share before goodwill
   amortization........................................    $     0.31   $     0.41    $     1.18    $     1.18    $    (0.24)
Ratio of EBITDA to interest expense(3).................           9.4x         7.1x         12.0x         12.3x          7.4x
Ratio of earnings to fixed charges(4)..................           3.1x         3.3x          7.3x          8.1x          4.6x
Depreciation and amortization..........................    $   56,518   $   57,180    $   52,972    $   43,081    $   30,855
Capital expenditures...................................    $   45,463   $   30,729    $   78,356    $   81,805    $   39,908

Balance Sheet Data (end of period):
Working capital........................................    $  263,378   $  310,175    $  290,398    $  218,771    $  194,639
Total assets...........................................     1,076,982    1,131,313     1,259,092     1,157,296       821,186
Total debt.............................................       136,507      233,335       260,692       237,897       217,458
Common stockholders' equity............................       731,983      694,245       658,441       553,232       414,410
</TABLE>

______________________

(1)  The 1996 operating loss includes $63.1 million of charges for the write-off
     of certain assets, $11.3 million of Drexel transaction costs, and $2.2
     million of charges for the write-off of Italian operations. Excluding these
     costs, operating profit in 1996 was $100.2 million. The 1998 operating
     profit includes $1.5 million write-off of rental equipment and $0.9 million
     allowance for abandoned leases and other obligations. Excluding these
     charges, operating profit was $187.6 million. The 1999 operating profit
     includes $7.8 million of transaction costs and write-offs associated with
     the terminated Newpark merger. Excluding these costs, operating profit was
     $75.2 million. The 2000 operating profit includes $9.7 million of financial
     advisor fees, $4.3 million of compensation costs, $5.1 million to fully
     vest employees participating in the Executive Stock Match program, $3.5
     million in equipment rationalization charges and $3.9 million of other
     transaction costs associated with the Varco Merger. Excluding these costs,
     operating profit was $87.5 million.

(2)  "EBITDA" means earnings before interest, taxes, depreciation, amortization,
     restructuring charges, write-off of long-lived assets, merger and
     transaction costs, write-off of Italian operations and extraordinary items
     and should not be considered as an alternative to net income or any other
     generally accepted accounting principles measure of performance as an
     indicator of the Company's operating performance or as a measure of
     liquidity. The Company believes EBITDA is a widely accepted financial
     indicator of a company's ability to service debt.

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

(4)  For the purpose of this calculation, "earnings" consist of net income
     (loss) before income taxes, write-off of long-lived assets, transaction
     costs, write-off of Italian operations, restructuring charges,
     extraordinary items, and fixed charges. "Fixed charges" consist of interest
     expense and amortization of debt discount and related expenses believed by
     management to be representative of the interest factor thereon.

                                       25
<PAGE>

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

General

     Business Combination - Merger

     On May 30, 2000, the stockholders of Tuboscope Inc. (the "Company") and
Varco International, Inc. ("Varco") approved the merger (the "Merger") of Varco
into the Company through an exchange of .7125 shares of the Company's stock for
each share of Varco. In connection with the Merger, the Company changed its name
to Varco International, Inc. and its New York Stock Exchange (NYSE) symbol from
"TBI" to "VRC".

     The Merger has been accounted for as a pooling of interests and accordingly
all prior periods consolidated financial statements have been restated to
include the combined results of operations and financial condition. The
following management's discussion and analysis of results of operations and
financial condition is based upon such combined results.

     The Company is organized based on the products and services it offers. In
connection with the Merger, the Company reorganized into four principal business
segments: Drilling Equipment Sales, Tubular Services, Drilling Services, and
Coiled Tubing & Wireline Products. See Note 12 of notes to Financial Statements.

Operating Environment Overview:

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

<TABLE>
<CAPTION>
                                                                                                      %         %
                                                                                                    2000 v     1999 v
                                                                    2000*       1999*      1998*     1999       1998
                                                                    -----       -----      -----   ------      -----
     <S>                                                            <C>         <C>        <C>       <C>       <C>
     Rig Activity:
          U.S..................................................        916        623       829      47.0%     (24.8%)
          Canada...............................................        353        246       261      43.5%      (5.7%)
          International........................................        652        588       756      10.9%     (22.2%)
                                                                     -----      -----     -----      -----      -----
          Worldwide............................................      1,921      1,457     1,846      31.8%     (21.1%)

     Workover Rig Activity:
          U.S..................................................      1,056        835     1,088      26.5%     (23.3%)
          Canada...............................................        342        253       251      35.2%       0.1%
                                                                     -----      -----     -----      -----      -----
          North America........................................      1,398      1,088     1,339      28.5%     (18.7%)

     West Texas Intermediate Crude prices (per barrel).........     $30.34     $19.20    $14.39      58.0%      33.4%
     Natural Gas Prices ($/mbtu)...............................     $ 4.32     $ 2.33    $ 2.09      85.4%      11.5%
</TABLE>

___________________

*  Averages for the years indicated. The source for rig activity information was
   Baker Hughes Incorporated ("BHI"), and the source for oil and gas prices was
   Department of Energy, Energy Information Administration (www.eia.doe.gov) for
                                                            ---------------
   2000 and The Wall Street Journal for 1999 and 1998.

     Oil and gas prices increased significantly throughout the four quarters of
2000 compared to the same periods of 1999, which resulted in a full year
increase of 58.0% for West Texas Intermediate Crude, and an increase in Natural
Gas Prices of 85.4%. Oil prices began to improve in the first half of 1999 after
reaching a decade low of $12.95 in the fourth quarter of 1998. The eight
quarters since then have resulted in sequential increases reaching an average
high of $31.98 per barrel in the fourth quarter of 2000. The recent recovery in
oil prices is primarily the result of an increase in worldwide energy
consumption and an agreement between certain major oil producers to limit
worldwide oil production. There can be no assurances that these producers will

                                       26
<PAGE>

comply with the self-imposed limitations on oil production, or that the
improvement in oil prices will stabilize or continue.

     The improvement in oil and gas prices has resulted in a worldwide increase
in rig activity of 31.8% in 2000, with a substantial portion of the improvement
in North America (U.S. 47.0% and Canada 43.5%). The international market, which
has languished behind the recovery in North America, was up 10.9% in rig
activity in 2000. International rig activity was significantly up in the second
half of the year (up 16.6% over the first half) as Latin America, Europe, and
the Far East all showed significant improvement.

     The improved oil and gas prices and related increase in rig activity had a
significant impact on the Company's results of operations as operating profit
(excluding transaction costs and write-offs) was up 16.4% in 2000 compared to
1999, increasing from $75.2 million to $87.5 million. The increase in activity
favorably impacted the Company's services oriented businesses, as Tubular
Services and Drilling Services revenue increased 27.3% and 23.6% in 2000 over
1999, respectively. In addition, the Company's Drilling Equipment Sales group
reported an increase in new orders of 31% in 2000 over 1999, and was recently
awarded a $25 million dollar rig order from Maersk (Hyundai Heavy Industries)
for the construction of a new harsh environment jack-up rig.

                                       27
<PAGE>
     The following table details the U.S., Canada, and International rig
activity and West Texas Intermediate Oil prices for the past three years on a
quarterly basis:

                                Industry Trends
                           Rig Counts and Oil Prices

<TABLE>
<CAPTION>
                            1Q98    2Q98    3Q98    4Q98    1Q99    2Q99    3Q99    4Q99   1Q00    2Q00    3Q00     4Q00
     <S>                   <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
     Total Rigs            2,236   1,838   1,725   1,572   1,462   1,224   1,462   1,683   1,826   1,716   1,988   2,159
     Canada                  459     175     205     201     290     104     254     337     480     245     314     375
     US                      966     865     794     689     552     523     643     775     770     842     980    1073
     International           811     798     726     682     620     597     565     571     576     629     694     711
     W. TX Int. ($)        15.88   14.63   14.10   12.95   12.97   17.64   21.68   24.50   28.82   28.82   31.74   31.98
</TABLE>

   Source: Rig count: BHI
   West Texas Intermediate Crude Price: Department of Energy, Energy Information
   Administration (www.eia.doe.gov) for 2000 and The Wall Street Journal for
   1999.


Results of Operations

Year Ended December 31, 2000 vs Year Ended December 31, 1999

     Revenue. Revenue for the year ended December 31, 2000 was $866.6 million,
down $109.2 million from the year ended December 31, 1999. The decrease was due
to a $220.9 million decline in revenue for Drilling Equipment Sales, which
reported revenue of $504.2 million in 1999. The decline in Drilling Equipment
Sales was a result of a strong 1999, which included the shipment of orders
placed during the last new rig construction cycle in 1997 and the first half
1998. This decline was partially offset by increased revenue in Tubular
Services, Drilling Services, and Coiled Tubing and Wireline Products, which
benefited from the upturn in the oil and gas industry discussed above.

                                      28

<PAGE>

     The following table summarizes the Company's revenue by operating segment
for 2000, 1999, and 1998 (in thousands):

<TABLE>
<CAPTION>
                                                             2000            1999             1998
                                                          --------         --------       ----------
<S>                                                       <C>              <C>             <C>
Drilling Equipment Sales............................      $283,360         $504,245       $  623,268
Tubular Services....................................       248,099          194,929          276,952
Drilling Services...................................       250,229          202,518          286,052
Coiled Tubing & Wireline Products...................        84,927           74,156          121,409
                                                          --------         --------       ----------
                                                          $866,615         $975,848       $1,307,681
                                                          ========         ========       ==========
</TABLE>

     Revenue from the Company's Drilling Equipment Sales in 2000 was $283.4
million, a decline of $220.9 million (43.8%) compared to 1999 due to lower
orders in 1999 which resulted in a decline in 2000 shipments of equipment for
upgrading, conversion, and new construction of offshore drilling rigs,
particularly floating rigs that are capable of drilling in water depths
exceeding 3,000 feet. However, new orders for 2000 increased $75.9 million
(31.5%) over 1999. Backlog at December 31, 2000 for Drilling Equipment Sales was
$88.1 million, an increase of $32.3 million (58.0%) compared to $55.7 million at
December 31, 1999. The increase in new orders and backlog was due to an increase
in worldwide drilling activity, and the receipt of the Maersk rig order
discussed above. In accordance with industry practice, orders and commitments
generally are cancellable by customers at any time.

     Revenue from the Company's Tubular Services was $248.1 million in 2000, an
increase of $53.2 million (27.3%) over 1999 results. The increase reflected the
change in North America rig activity, which was up 46.0% in 2000 over 1999. The
majority of the revenue increase was attributable to North America inspection
and coating revenue which was up $33.3 million (46.8%) in 2000 over 1999. Also,
this segment's fiberglass tubular operations approximately doubled in 2000
compared to 1999 (up $15.4 million). Eastern Hemisphere operations, which
include Europe, Middle East, Africa, and Far East operations, increased over the
prior year as result of greater coating operations in the European and Far East
coating plants and greater European inspection revenue.

     Drilling Services revenue was $250.2 million, an increase of $47.7 million
(23.6%) over 1999 results. The increase in North America rig activity also had a
favorable impact on the Company's Drilling Services revenue, as the majority of
the revenue increase was in the North America rental and services business for
both the segment's Solids Control and Instrumentation operations. Latin America
revenue was also strong as Solids Control revenue in that area increased 59.4%
from $40.9 million in 1999.

     Coiled Tubing and Wireline Products revenue was $84.9 million, an increase
of $10.8 million (14.5%) compared to 1999 revenue of $74.2 million. The increase
was primarily attributable to greater sales of coiled tubing pressure equipment
for 2000 compared to 1999. Backlog for this segment was at $61.2 million at
December 31, 2000, an increase of 241.9% over December 31, 1999 backlog of $17.9
million.

     Gross Profit: Gross profit was $239.6 million (27.6% of revenue) in 2000
compared to $250.5 million (25.7% of revenue) in 1999. Gross profit dollars were
down due to lower revenue in 2000. The increase in gross profit percentages was
due to strong operating leverage in Tubular Services, Drilling Services, and
Coiled Tubing and Wireline products. Cost reductions implemented in the Drilling
Equipment Sales product group in 2000 offset some of the impact that the decline
in revenue had on gross profit percents.

     Selling, General, and Administrative Costs. Selling, general, and
administrative costs were $119.9 million in 2000, a decrease of $15.3 million
(11.3%) compared to 1999 results. Selling, general, and administrative costs
were down primarily in Drilling Equipment Sales in 2000 compared to 1999 as a
result of lower revenue. In addition, the Company incurred severance costs
throughout 1999 in response to market conditions, which did not repeat in 2000.

     Research and Engineering Costs. Research and engineering costs were $32.1
million in 2000, a decrease of $8.0 million (19.9%) compared to 1999 results.
The decrease in research and engineering costs is due to reduced engineering
resources in Drilling Equipment Sales group in response to the decline in new
orders.

                                       29
<PAGE>

     Transaction Costs and Write-Offs. Transaction costs and write-offs were
$26.6 million and $7.8 million for December 31, 2000 and 1999, respectively. The
2000 merger and transaction costs included cash and non-cash transaction costs.
Cash costs included financial advisor fees of $9.7 million, compensation costs
of $4.3 million, and other costs, including legal, accounting and printing costs
of $3.9 million. Non-cash transaction costs included $5.1 million to fully vest
employees participating in the Executive Stock Match Program and $3.5 million of
equipment rationalization write-offs. The 1999 transaction costs consisted of
the cost of the cancelled merger with Newpark Resources, Inc. ("Newpark").

     Operating Profit. Operating profit was $60.9 million for 2000 compared to
$67.3 million for 1999. Excluding merger and transaction costs, operating profit
percent was 10.1% of revenue in 2000 compared to 7.7% of revenue in 1999. The
improvement was due to greater gross profit margins as a result of product mix,
lower selling, general, and administrative costs, and lower research and
engineering costs as discussed above.

     Interest Expense. Interest expense was $15.3 million and $18.9 million for
the years ended December 31, 2000 and 1999. The decrease was due to the
reduction of debt in the second quarter of 2000, as cash from Varco was applied
to reduce debt upon completion of the Merger.

     Other Expense (Income) Other income includes interest income, foreign
exchange losses (gains), and other expense (income), which resulted in income of
$0.2 million in 2000 compared to income of $1.6 million in 1999. The decline in
other income was primarily due to foreign exchange losses in 2000 of $1.1
million compared to a foreign exchange gain in 1999 of $0.5 million.

     Provision for Income Taxes. The Company recorded a tax provision of $24.8
million (54.1% of pre-tax income) and $20.3 million (40.5% of pre-tax income)
for 2000 and 1999, respectively. These tax provisions were higher than expected,
based on a 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 $21.1 million and $29.8 million for 2000 and
1999, respectively. The decline in net income was due to the factors discussed
above.

Year Ended December 31, 1999 vs. Year Ended December 31, 1998

     Revenue. Revenue for the year ended December 31, 1999 was $975.8 million,
a decrease of $331.8 million (25.4%) compared to 1998 revenue of $1,307.7
million. The 1999 results were adversely impacted for much of the year by the
depressed oil and gas industry as indicated by the low worldwide rig activity.
The drop in 1999 rig activity was especially heavy in some of the Company's most
significant markets including the U.S. (25%), Europe (17%), Far East (20%), and
Latin America (23%).

     Revenue from the Company's Drilling Equipment Sales segment was $504.2
million in 1999, a decrease of $119.0 million (19.1%) from 1998 revenue of
$623.3 million. The decline was primarily the result of the reduction in, and
cancellation of, orders associated with upgrading and construction of offshore
drilling rigs. The cancellations in 1999 and 1998 were due to customers
terminating the construction of certain offshore drilling rigs and cancelling
the related equipment orders. Orders for 1999 Drilling Equipment Sales declined
$386.1 million (61.5%) from 1998.

     Tubular Services revenue was $194.9 million in 1999, a decrease of $82.0
million (29.6%) from 1998 revenue of $277.0 million. The decline was primarily
the result of lower revenue in the U.S., Far East, Latin America, and European
operations due to low activity and price erosion in these markets. The decline
was slightly offset by an increase in Canada inspection operations as Canadian
rig activity increased in the second half of 1999 compared to the prior year
period.

     Drilling Services revenue was $202.5 million in 1999, a decrease of $83.5
million (29.2%) compared to 1998 revenue of $286.1 million. Lower drilling
activity, pricing erosion, and lower levels of capital equipment sales caused
the decline, which affected operations worldwide, especially in the U.S., Latin
America, and Europe.

                                       30
<PAGE>

     Coiled Tubing and Wireline Products revenue was $74.2 million, a decrease
of $47.3 million (38.9%) compared to 1998 revenue of $121.4 million. The
decrease was due to a decline in spending by the Company's customers on new
coiled tubing and wireline units in response to the depressed oilfield market.
The decline was partially offset by the full year effect of 1998 acquisitions on
1999 results.

     Gross Profit. Gross Profit was $250.5 million (25.7% of revenue) in 1999
compared to $397.4 million (30.4% of revenue) in 1998. The decline in 1999 gross
profit dollars and percentages was due to the lower revenue discussed above.

     Selling, General, and Administrative Costs. Selling, general, and
administrative costs were $135.2 million for 1999, a decrease of $33.4 million
(19.8%) compared to 1998 costs. Lower selling, general, and administrative costs
were due to costs and employment reductions, which were implemented in 1998 and
continued in 1999 in response to market conditions.

     Research and Engineering Costs. Research and engineering costs were $40.1
million for 1999, a decrease of $7.2 million (or 15.1%) compared to 1998 costs.
The decline was due to the completion of certain engineering projects and cost
control measures implemented in 1998 and continued in 1999.

     Transaction Costs and Write-Offs. Transaction costs for 1999 and 1998 were
$7.8 million and $2.4 million, respectively. The 1999 transaction costs and
write-offs of $7.8 million were related to the cancellation of the Newpark
merger and the write-off of the Company's investment in its disposal business.
The 1998 transaction and write-off costs of $2.4 million were due to a non-cash
write-off of rental equipment of $1.5 million, and an allowance for abandoned
leases and other obligations of $0.9 million.

     Operating Profit. Operating profit was $67.3 million for 1999 compared to
$179.1 for 1998. The decrease was due to the factors discussed above.

     Interest Expense. Interest expense was $18.9 million in 1999 compared to
$19.9 million in 1998 as lower debt levels were partially offset by higher
interest rates.

     Other Expense (Income). Net other expense, which includes interest income,
foreign exchange, losses (gains) and other expense (income) resulted in income
of $1.6 million in 1999 compared to other expenses of $0.8 million in 1998.

     Provision for Income Taxes. The Company's effective tax rate for 1999 and
1998 was 40.5% and 35.4%, respectively. The 1999 tax rate is higher than the
U.S. tax rate of 35% due to charges not allowed under domestic and foreign
jurisdictions related to goodwill amortization and foreign earnings subject to
tax rates differing from domestic rates.

     Net Income. Net income was $29.8 million and $102.3 million for 1999 and
1998, respectively. The decline in net income was due to the factors discussed
above.

Financial Condition and Liquidity

     At December 31, 2000, the Company had cash and cash equivalents of $12.2
million, and current and long-term debt of $136.5 million. At December 31, 1999,
the Company's cash and cash equivalents were $83.1 million, and current and
long-term debt was $233.3 million. During the second quarter of 2000 and after
the completion of the Varco Merger, excess cash on hand was used to reduce
outstanding debt. The Company's debt to total capitalization ratio was 15.7% at
December 31, 2000 compared to 25.2% at December 31, 1999. The Company's
outstanding debt at December 31, 2000 consisted of $99.0 million of Notes (net
of discounts), $26.8 million of term loans due under the Company's Senior Credit
Agreement, and other debt of $10.7 million.

     For the fiscal year ended December 31, 2000, cash provided by operating
activities was $81.8 million compared to $119.1 million for 1999. Cash was
provided by operations primarily through net income of $21.1 million plus
non-cash charges of $86.9 million. These items were offset to some extent by an
increase in accounts receivable of $15.9 million, an increase in inventory of
$9.9 million, and a decrease in accounts payable, accrued liabilities, and other
of $6.6 million. The increase in accounts receivable in 2000 as compared to 1999
was due to

                                       31
<PAGE>

an increase in days sales outstanding from 91.3 days at December 31, 1999 to
98.7 days at December 31, 2000, as a greater portion of receivables were derived
in international locations, which generally have higher days sales outstanding,
in 2000 as compared to 1999. The increase in inventory was due to the recent
increases in orders and backlog, and a general increase in activity in 2000
compared to 1999. The reduction in accounts payable, accrued liabilities, and
other was due to the reduction of outstanding overdrafts and lower accrued
interest at December 31, 2000 as compared to December 31, 1999.

     For the fiscal year ended December 31, 2000, the Company used $64.9
million of net cash for investing activities compared to $43.6 million used in
1999. Capital expenditures of $45.5 million for 2000 were primarily related to
the Company's new Truscope inspection unit, Solids Control equipment in the
strong Canadian and Latin American markets, new computer equipment for the
Company's Drilling Equipment Sales group, and rental assets associated with the
Company's instrumentation business.

     For the fiscal year ended December 31, 2000, the Company used $86.7 million
of net cash for financing activities compared to $29.9 million used in 1999. The
main use of cash for financing activities was for the reduction of outstanding
debt.

     At December 31, 2000, the Company had outstanding letters of credit under
its Credit Agreement of $7.1 million. The available amounts under the Company's
$100.0 million revolving credit facility and $5 million swingline facility was
$95.1 million and $2.8 million, respectively, at December 31, 2000.

     The Company believes that its December 31, 2000 cash and cash equivalents,
its credit facility, and cash flow from operations will be sufficient to meet
its capital expenditures and its operating cash needs for the foreseeable
future.

Factors Affecting Future Operating Results

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

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

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

     The Company's foreign operations, which include significant operations in
Canada, Europe, the Far East, the Middle East and Latin America, are subject to
the risks normally associated with conducting business in foreign countries,
including uncertain political and economic environments, which may limit or
disrupt markets, restrict the movement of funds or result in the deprivation of
contract rights or the taking of property without fair compensation.
Government-owned petroleum companies located in some of the countries in which
the Company operates have adopted policies (or are subject to governmental
policies) giving preference to the purchase of goods

                                       32
<PAGE>

and services from companies that are majority-owned by local nationals. As a
result of such policies, the Company relies on joint ventures, license
arrangements and other business combinations with local nationals in these
countries. In addition, political considerations may disrupt the commercial
relationship between the Company and such government-owned petroleum companies.
Although the Company has not experienced any significant problems in foreign
countries arising from nationalistic policies, political instability, economic
instability or currency restrictions, there can be no assurance that such a
problem will not arise in the future.

     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 2000, 1999, and 1998. Compliance with
environmental laws and regulations due to currently unknown circumstances or
developments, however, could result in substantial costs and have a material
adverse effect on the Company's results of operations and financial condition.

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

ITEM 7A.  QUANTITATIVE & QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company does not believe it has a material exposure to market risk.
The Company has historically managed its exposure to interest changes by using a
combination of fixed rate debt, variable rate debt, interest swap and collar
agreements in its total debt portfolio. As of December 31, 2000, the Company had
no interest rate swap or collar agreements outstanding. At December 31, 2000,
the Company had $136.5 million of outstanding debt. Fixed rate debt included
$99.0 million of Senior Notes (net of discounts) at a fixed interest rate of 7
1/2%. With respect to foreign currency fluctuations, the Company uses natural
hedges to minimize the effect of rate fluctuations. When natural hedges are not
sufficient, generally it is the Company's policy to enter into forward foreign
exchange contracts to hedge significant transactions for periods consistent with
the underlying risk. The Company had no forward foreign exchange contracts
outstanding at December 31, 2000. The Company does not enter into foreign
currency or interest rate transactions for speculative purposes.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements of the Company and subsidiaries required to be
included in this Item 8 are set forth in Item 14 of this Report.

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

     None.

                                       33
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     There is hereby incorporated herein by reference the information appearing
under the captions "Election of Directors" and "Executive Officers of the
Company" of the registrant's definitive Proxy Statement for its 2001 Annual
Meeting to be filed with the Securities and Exchange Commission (the
"Commission") on or before April 30, 2001.

ITEM 11. EXECUTIVE COMPENSATION

     There is hereby incorporated herein by reference the information appearing
under the caption "Executive Compensation" of the registrant's definitive Proxy
Statement for its 2001 Annual Meeting to be filed with the Commission on or
before April 30, 2001.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     There is hereby incorporated herein by reference the information appearing
under the caption "Voting Securities and Principal Holders Thereof" of the
registrant's definitive Proxy Statement for its 2001 Annual Meeting to be filed
with the Commission on or before April 30, 2001.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There is hereby incorporated herein by reference the information appearing
under the caption "Certain Transactions" of the registrant's definitive Proxy
Statement for its 2001 Annual Meeting to be filed with the Commission on or
before April 30, 2001.

                                       34
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)(1) Financial Statements of the Company

<TABLE>
<CAPTION>
                                                                                                                 Page
                                                                                                                 ----
<S>                                                                                                           <C>
Report of Independent Auditors..........................................................................             F-1
Consolidated Balance Sheets at December 31, 2000 and 1999...............................................             F-2
Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998.................             F-3
Consolidated Statements of Common Stockholders' Equity and Comprehensive Income (Loss) for the
   years ended December 31, 2000, 1999, and  1998,......................................................             F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998.............             F-5
Notes to Consolidated Financial Statements..............................................................      F-6 - F-27
</TABLE>

        (2) Financial Statement Schedules:

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

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

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

        (3) The list of exhibits contained in the Index to Exhibits are filed as
part of this Report--Page 36.

     (b) Reports on Form 8-K

          There were no reports on Form 8-K filed in the fourth quarter of 2000.

                                       35
<PAGE>

                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit                                        Description                                                     Note No.
-------                                        ------------                                                    --------
  No.
  ---
<S>           <C>                                                                                              <C>
  3.1         Third Amended and Restated Certificate of Incorporation, dated May 30, 2000.

  3.2         Third Amended and Restated Bylaws.

  3.3         Certificate of Designations of Series A Junior Participating Preferred Stock, dated
              November 30, 2000.

  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.

  4.2         Registration Rights Agreement dated May 13, 1988 among the Company, Brentwood                     (Note 1)
              Associates, Hub Associates IV, L.P. and the investors listed therein.

  4.3         Purchase Agreement dated as of October 1, 1991 between the Company and Baker                      (Note 2)
              Hughes Incorporated regarding certain registration rights.

  4.4         Registration Rights Agreement dated April 24, 1996 among the Company, SCF III,                    (Note 8)
              L.P., D.O.S. Partners L.P., Panmell (Holdings), Ltd. and Zink Industries Limited.

  4.5         Registration Rights Agreement dated March 7, 1997 among the Company and certain                   (Note 9)
              stockholders of Fiber Glass Systems, Inc.

  4.6         Indenture, dated as February 25, 1998, between the Company, the Guarantors named                  (Note 10)
              therein and The Bank of New York Trust Company of Florida as trustee, relating to
              $100,000,000 aggregate principal amount of 7 1/2% Senior Notes due 2008 Specimen
              Certificate of 7 1/2% Senior Notes due 2008 (the "Private Notes"); and Specimen
              Certificate at 7 1/2% Senior Notes due 2008 (the "Exchange Notes").

 10.1         Amended and Restated Secured Credit Agreement, dated as of February 9, 1998,                      (Note 10)
              between Tuboscope Inc., and Chase Bank of Texas, National Association, ABN
              Amro Bank N.V., Houston Agency, and the other Lenders Party Thereto, and ABN
              Amro Bank N.V., Houston Agency as Administrative Agent (includes form of
              Guarantee).

 10.1.1       Form of Amendment No. 1 to Amended and Restated Secured Credit Agreement dated                    (Note 12)
              as of March 29, 1999.

 10.1.2       Form of Reaffirmation of Guarantee relating to Amended and Restated Secured Credit                (Note 12)
              Agreement dated as of March 29, 1999.

 10.2*        Deferred Compensation Plan dated November 14, 1994; Amendment thereto dated                       (Note 11)
              May 11, 1998.

 10.3*        Amended and Restated 1996 Equity Participation Plan

 10.3.1*      Form of Non-qualified Stock Option Agreement for Employees and Consultants;                       (Note 6)
              Form of Non-qualified Stock Option Agreement for Independent Directors.

 10.4*        DOS Ltd. 1993 Stock Option Plan; Form of D.O.S. Ltd. Non Statutory Stock Option Agreement.        (Note 7)

 10.5*        Amended and Restated Stock Option Plan for Key Employees of Tuboscope Vetco International         (Note 3)
              Corporation; Form of Revised Incentive Stock Option Agreement; and Form of Revised
              Non-Qualified Stock Option Agreement.

 10.6*        Stock Option Plan for Non-Employee Directors; Amendment to Stock Option Plan for                  (Note 4)
              Non-Employee Directors; and Form of Stock Option Agreement.

 10.7*        The Varco 1982 Non-Employee Director Stock Option Plan                                            (Note 15)

 10.8*        Varco International, Inc. Supplemental Executive Retirement Plan                                  (Note 21)
</TABLE>

                                       36
<PAGE>

<TABLE>
<CAPTION>
Exhibit                                        Description                                                     Note No.
-------                                        ------------                                                    --------
  No.
  ---
<S>           <C>                                                                                              <C>
 10.8.1*      Amendment to Varco International, Inc. Supplemental Executive Retirement Plan                    (Note 23)

 10.8.2*      Second Amendment to Varco International, Inc. Supplemental Executive Retirement Plan             (Note 24)

 10.9         Lease dated March 7, 1985, as amended                                                            (Note 14)

 10.9.1       Agreement dated as of January 1, 1982, with respect to Lease included as Exhibit 10.9 hereto     (Note 16)

 10.9.2       Agreement dated as of January 1, 1984, with respect to Lease included as Exhibit 10.9 hereto     (Note 17)

 10.9.3       Agreement dated as of February 8, 1985, with respect to Lease included as Exhibit 10.9 hereto    (Note 17)

 10.9.4       Agreement dated as of April 12, 1985, with respect to Lease included as Exhibit 10.9 hereto      (Note 18)

 10.9.5       Amendment dated as of January 11, 1996, with respect to Lease included as Exhibit 10.9 hereto    (Note 22)

 10.10        Standard Industrial Lease-Net dated September 29, 1988 for the premises at 743 N. Eckhoff,       (Note 19)
              Orange, California

 10.10.1      First amendment dated as of January 11, 1996 to Lease included as Exhibit 10.10 hereto           (Note 22)

 10.11*       The Varco International, Inc. 1990 Stock Option Plan, as amended                                 (Note 20)

 10.11.1*     Amendments to the Varco International, Inc. 1990 Stock Option Plan                               (Note 25)

 10.11.2*     Form of amendment to stock option agreements under the Varco International, Inc. 1990 Stock      (Note 25)
              Option Plan

 10.12*       Varco International, Inc. 1994 Directors' Stock Option Plan                                      (Note 22)

 10.12.1*     Amendment to Varco International, Inc. 1994 Directors' Stock Option Plan                         (Note 24)

 10.13*       The Varco International, Inc. Deferred Compensation Plan                                         (Note 25)

 10.14        Master Leasing Agreement, dated December 18, 1995 between the Company and Heller Financial       (Note 5)
              Leasing, Inc.

 10.14.1*     Form of Executive Agreement of certain members of senior management                              (Note 13)

 10.15*       Form of First Amendment to Executive Agreements                                                  (Note 13)

 10.16*       Executive Agreement of John F. Lauletta                                                          (Note 13)

 10.17*       Executive Agreement of Joseph C. Winkler                                                         (Note 13)

 10.18*       Executive Agreement of George Boyadjieff                                                         (Note 26)

 10.19*       Executive Agreement of Michael W. Sutherlin                                                      (Note 26)

 10.20*       Executive Agreement of Wallace K. Chan                                                           (Note 26)

 10.21*       Form of Indemnity Agreement                                                                      (Note 13)

 21           Subsidiaries

 23           Consent of Independent Auditors
</TABLE>
-----------
*  Management contract, compensation plan or arrangement.

                                       37
<PAGE>

  Note 1    Incorporated by reference to the Company's Registration Statement on
            Form S-1 (No. 33-31102).

  Note 2    Incorporated by reference to the Company's Registration Statement on
            Form S-1 (No. 33-43525).

  Note 3    Incorporated by reference to the Company's Registration Statement on
            Form S-8 (No. 33-72150).

  Note 4    Incorporated by reference to the Company's Registration Statement on
            Form S-8 (No. 33-72072).

  Note 5    Incorporated by reference to the Company's Annual Report on
            Form 10-K for the fiscal year ended December 31, 1995.

  Note 6    Incorporated by reference to the Company's Registration Statement on
            Form S-8 (No. 333-05233).

  Note 7    Incorporated by reference to the Company's Registration Statement on
            Form S-8 (No. 333-05237).

  Note 8    Incorporated by reference to the Company's Current Report on Form
            8-K filed on January 16, 1996.

  Note 9    Incorporated by reference to the Company's Current Report on 8-K
            Filed on March 19, 1997, as amended by Amendment No. 1 filed on May
            7, 1997.

  Note 10   Incorporated by reference to the Company's Registration Statement on
            Form S-4 (No. 333-51115).

  Note 11   Incorporated by reference to the Company's Quarterly Report on Form
            10-Q for the quarter ended June 30, 1998.

  Note 12   Incorporated by reference to the Company's Annual Report on Form
            10-K for the fiscal year ended December 31, 1998.

  Note 13   Incorporated by reference to the Company's Registration Statement of
            Form S-4 (333-34582).

  Note 14   Incorporated by reference to Varco's Annual Report on Form 10-K for
            the year ended December 31, 1981.

  Note 15   Incorporated by reference to Varco's Quarterly Report on Form 10-Q
            for the quarter ended June 30, 1982.

                                       38
<PAGE>

  Note 16      Incorporated by reference to Varco's Annual Report on Form 10-K
               for the fiscal year ended December 31, 1982.

  Note 17      Incorporated by reference to Varco's Annual Report on Form 10-K
               for the fiscal year ended December 31, 1984.

  Note 18      Incorporated by reference to Varco's Quarterly Report on Form
               10-Q for the fiscal quarter ended June 30, 1985.

  Note 19      Incorporated by reference to Varco's Annual Report on Form 10-K
               for the fiscal year ended December 31, 1988.

  Note 20      Incorporated by reference to Varco's Registration Statement on
               Form S-8, Registration No. 333-21681.

  Note 21      Incorporated by reference to Varco's Annual Report on Form 10-K
               for the fiscal year ended December 31, 1992.

  Note 22      Incorporated by reference to Varco's Annual Report on Form 10-K
               for the fiscal year ended December 31, 1995.

  Note 23      Incorporated by reference to Varco's Annual Report on Form 10-K
               for the fiscal year ended December 31, 1996.

  Note 24      Incorporated by reference to Varco's Annual Report on Form 10-K
               for the fiscal year ended December 31, 1997.

  Note 25      Incorporated by reference to Varco's Annual Report on Form 10-K
               for the year ended December 31, 1999.

  Note 26      Incorporated by reference to Varco's Annual Report on Form
               10-K/A for the year ended December 31, 1999.

                                       39
<PAGE>

                                  SIGNATURES

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

                                        VARCO INTERNATIONAL, INC.

Dated: March 8, 2001                    By:  /s/ GEORGE I. BOYADJIEFF
                                            ------------------------------------
                                                     George I. Boyadjieff
                                                     Chairman of the Board

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

<TABLE>
<CAPTION>
                Signature                                 Title                                         Date
                ---------                                 -----                                         ----
<S>                                          <C>                                                   <C>
        /s/ GEORGE I. BOYADJIEFF             Chairman of the Board and Chief                       March 8, 2001
---------------------------------------
          George I. Boyadjieff                  Executive Officer

          /s/ JOHN F. LAULETTA               Director, President and Chief Operating               March 8, 2001
---------------------------------------
            John F. Lauletta                    Officer

        /s/ MICHAEL W. SUTHERLIN             Group President, Products                             March 8, 2001
---------------------------------------
          Michael W. Sutherlin

         /s/ JOSEPH C. WINKLER               Executive Vice President, Chief                       March 8, 2001
---------------------------------------
           Joseph C. Winkler                    Financial Officer and Treasurer

        /s/ JAMES F. MARONEY III             Vice President, Secretary and                         March 8, 2001
---------------------------------------
            James F. Maroney                    General Council

         /s/ KENNETH L. NIBLING              Vice President, Human Resources                       March 8, 2001
---------------------------------------
           Kenneth L. Nibling                   and Administration

         /s/ DONALD L. STICHLER              Vice President, Controller, and Chief                 March 8, 2001
---------------------------------------
           Donald L. Stichler                   Accounting Officer

Directors:

           /s/ GEORGE S. DOTSON                 Director                                           March 8, 2001
---------------------------------------
             George S. Dotson

             /s/ ANDRE R. HORN                  Director                                           March 8, 2001
---------------------------------------
               Andre R. Horn

         /s/ RICHARD A. KERTSON                 Director                                           March 8, 2001
---------------------------------------
           Richard A. Kertson

          /s/ ERIC L. MATTSON                   Director                                           March 8, 2001
---------------------------------------
            Eric L. Mattson

            /s/ L. E SIMMONS                    Director                                           March 8, 2001
---------------------------------------
             L. E. Simmons
</TABLE>

                                       40
<PAGE>

<TABLE>
<S>                                            <C>                                 <C>
         /s/ JEFFERY A. SMISEK                 Director                            March 8, 2001
---------------------------------------
           Jeffery A. Smisek

         /s/ DOUGLAS E. SWANSON                Director                            March 8, 2001
---------------------------------------
           Douglas E. Swanson

            /s/ EUGENE R. WHITE                Director                            March 8, 2001
---------------------------------------
              Eugene R. White

           /s/ JAMES D. WOODS                  Director                            March 8, 2001
---------------------------------------
             James D. Woods
</TABLE>

                                       41
<PAGE>

                        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, 2000 and 1999 and the related
consolidated statements of income, common stockholders' equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended
December 31, 2000. Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.

     We conducted our audits in accordance with 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, 2000 and 1999, and the consolidated
results of its income and its cash flows for each of the three years in the
period ended December 31, 2000, 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.


                                             Ernst & Young LLP

Houston, Texas
January 26, 2001

                                      F-1
<PAGE>

                           VARCO INTERNATIONAL, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             December 31,         December 31,
                                                                                 2000                 1999
                                                                             ------------         ------------
<S>                                                                          <C>                  <C>
                                A S S E T S
                                -----------
                                                                                        (In thousands)
Current assets:
     Cash and cash equivalents...........................................      $   12,176           $  $83,117
     Accounts receivable, net............................................         269,393              248,487
     Inventory, net......................................................         152,350              145,201
     Other current assets................................................          21,787               26,534
                                                                               ----------           ----------
        Total current assets.............................................         455,706              503,339
                                                                               ----------           ----------
Property and equipment, net..............................................         343,673              339,264
Identified intangibles, net..............................................          26,062               28,744
Goodwill, net............................................................         238,641              242,343
Other assets, net........................................................          12,900               17,623
                                                                               ----------           ----------
         Total assets....................................................      $1,076,982           $1,131,313
                                                                               ==========           ==========
                  L I A B I L I T I E S   A N D   E Q U I T Y
                  -------------------------------------------
Current liabilities:
     Accounts payable....................................................      $   66,182           $   69,297
     Accrued liabilities.................................................          91,423               86,890
     Income taxes payable................................................           4,376                3,091
     Current portion of long-term debt...................................          30,347               33,886
                                                                               ----------           ----------
        Total current liabilities........................................         192,328              193,164
Long-term debt...........................................................         106,160              199,449
Other liabilities........................................................          46,511               44,455
                                                                               ----------           ----------
        Total liabilities................................................         344,999              437,068
                                                                               ----------           ----------
Common stockholders' equity:
     Common stock, $.01 par value, 200,000,000 shares authorized,
       96,245,849 shares issued and 94,821,149 shares outstanding at
       December 31, 2000 (92,603,141 shares issued and 91,178,441
       outstanding at December 31, 1999).................................             962                  926
     Paid in capital.....................................................         498,692              475,734
     Retained earnings...................................................         264,580              243,525
     Accumulated other comprehensive loss................................         (16,921)             (10,610)
     Less: treasury stock at cost (1,424,700 shares).....................         (15,330)             (15,330)
                                                                               ----------           ----------
        Total common stockholders' equity................................         731,983              694,245
                                                                               ----------           ----------
        Total liabilities and equity.....................................      $1,076,982           $1,131,313
                                                                               ==========           ==========
</TABLE>

                            See accompanying notes.

                                      F-2
<PAGE>

                           VARCO INTERNATIONAL, INC.

                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                                    ------------------------
                                                                                2000          1999          1998
                                                                                ----          ----          ----
                                                                            (in thousands, except for common shares and
                                                                                          per share data)
<S>                                                                         <C>           <C>            <C>
Revenue:
     Sales..............................................................    $  463,556    $  708,587     $  938,057
     Services and rentals...............................................       403,059       267,261        369,624
                                                                            ----------    ----------     ----------
        Total...........................................................       866,615       975,848      1,307,681
                                                                            ----------    ----------     ----------
Cost and expenses:
     Cost of sales......................................................       296,955       491,481        625,873
     Cost of services and rentals.......................................       321,647       225,436        276,681
     Amortization of goodwill...........................................         8,444         8,431          7,766
     Selling, general and administrative................................       119,942       135,195        168,594
     Research and engineering costs.....................................        32,146        40,149         47,305
     Transaction costs and write-offs...................................        26,570         7,808          2,400
                                                                            ----------    ----------     ----------
        Total...........................................................       805,704       908,500      1,128,619
                                                                            ----------    ----------     ----------
Operating profit........................................................        60,911        67,348        179,062
Other expense (income):
     Interest expense...................................................        15,282        18,926         19,945
     Interest income....................................................        (3,374)       (2,694)        (1,600)
     Foreign exchange loss (gain).......................................         1,134         (473)            848
     Other..............................................................         2,022         1,527          1,601
                                                                            ----------    ----------     ----------
Income before income taxes..............................................        45,847        50,062        158,268
Provision for income taxes..............................................        24,792        20,253         55,985
                                                                            ----------    ----------     ----------
Net income .............................................................    $   21,055    $   29,809     $  102,283
                                                                            ==========    ==========     ==========
Earnings per common share:
     Basic earnings per common share....................................    $     0.23    $     0.33     $     1.13
                                                                            ==========    ==========     ==========
     Dilutive earnings per common share.................................    $     0.22    $     0.32     $     1.09
                                                                            ==========    ==========     ==========
Weighted average number of common shares outstanding:
     Basic..............................................................    92,773,815    90,659,770     90,607,969
                                                                            ==========    ==========     ==========
     Dilutive...........................................................    95,355,904    92,693,264     93,648,261
                                                                            ==========    ==========     ==========
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>

                           VARCO INTERNATONAL, INC.

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                                    (LOSS)

<TABLE>
<CAPTION>
                                                                                                Accumulated               Total
                                                               Common                              Other                  Common
                                                  Shares     Stock $.01  Paid in    Retained   Comprehensive Treasury  Stockholders'
                                                Outstanding   Par Value  Capital    Earnings   Income (loss)   Stock      Equity
                                                -----------   ---------  -------    --------   -------------   -----      ------
                                                                                 (in thousands)
<S>                                             <C>          <C>         <C>        <C>        <C>           <C>       <C>
Balance, December 31, 1997....................       89,958     $  899   $445,167   $111,433     $  (4,267)  $     --    $553,232

1998 Comprehensive income:
    Net income................................           --         --         --    102,283            --         --     102,283
    Foreign currency translation adjustment...           --         --         --         --        (2,897)        --      (2,897)
                                                   --------     ------   --------   --------     ---------  ---------    --------
    1998 Comprehensive income.................           --         --         --    102,283        (2,897)        --      99,386

Common stock issued...........................          835          6      9,687         --            --         --       9,693

Common stock issued in exchange for
 convertible debt                                        55          5        828         --            --         --         833

Common stock issued in earn-out agreement               726          7      9,435         --            --         --       9,442

Tax benefit of options exercised..............           --         --      1,185         --            --         --       1,185

Treasury stock purchased......................       (1,424)        --         --         --            --    (15,330)    (15,330)
                                                   --------     ------   --------   --------     ---------  ---------    --------

Balance at December 31, 1998..................       90,150        917    466,302    213,716        (7,164)   (15,330)    658,441

1999 Comprehensive income:
    Net income................................           --         --         --     29,809            --         --      29,809
    Foreign currency translation adjustment...           --         --         --         --        (3,487)        --      (3,487)
    Unrealized gains on investments...........           --         --         --         --            41         --          41
                                                   --------     ------   --------   --------     ---------  ---------    --------
    1999 Comprehensive income.................           --         --         --     29,809        (3,446)        --      26,363

Common stock issued...........................        1,028          9      8,595         --            --         --       8,604

Tax benefit of options exercised..............           --         --        837         --            --         --         837
                                                   --------     ------   --------   --------     ---------  ---------    --------

Balance at December 31, 1999..................       91,178        926    475,734    243,525       (10,610)   (15,330)    694,245

2000 Comprehensive income:
    Net income................................           --         --         --     21,055            --         --      21,055
    Foreign currency translation adjustment...           --         --         --         --        (6,311)        --      (6,311)
                                                   --------     ------   --------   --------     ---------  ---------    --------
    2000 Comprehensive income.................           --         --         --     21,055        (6,311)        --      14,744

Common stock issued...........................        1,297         13     12,212         --            --         --      12,225

Common stock issued executive match program...          323          3      6,428         --            --         --       6,431

Conversion of stock warrants..................        2,023         20        (20)        --            --         --          --

Tax benefit of options exercised..............           --         --      4,338         --            --         --       4,338
                                                   --------     ------   --------   --------     ---------  ---------    --------

Balance at December 31, 2000..................       94,821     $  962   $498,692   $264,580      $(16,921) $ (15,330)   $731,983
                                                   ========     ======   ========   ========      ========  =========    ========
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>

                           VARCO INTERNATIONAL, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                        Years Ended December 31,
                                                                                        ------------------------
                                                                                     2000          1999         1998
                                                                                     -----         ----         ----
                                                                                             (in thousands)
<S>                                                                              <C>         <C>           <C>
Cash flows from operating activities:
Net income....................................................................   $   21,055  $     29,809  $   102,283
     Adjustments to reconcile net income to net cash provided by
        operating activities:
          Depreciation and amortization.......................................       56,518        57,180       52,972
          Non-cash merger and transaction costs...............................       12,101            --           --
          Other non-cash charges..............................................       18,317         7,070        6,786
          Write-off of investments............................................           --         4,279           --
          Changes in current assets and liabilities, net of effects
             from acquisitions:
               Accounts receivable............................................      (15,904)       50,722      (10,468)
               Inventory......................................................       (9,852)      100,230      (25,777)
               Prepaid expenses and other assets..............................          481         2,104         (260)
               Accounts payable, accrued liabilities and other................       (6,552)     (124,416)      19,984)
               United States and foreign income taxes payable.................        5,623        (7,914)     (11,603)
                                                                                 ----------  ------------  -----------
          Net cash provided by operating activities...........................       81,787       119,064       93,949
                                                                                 ----------  ------------  -----------

Cash flows used for investing activities:
     Capital expenditures.....................................................      (45,463)      (30,729)     (78,356)
     Business acquisitions, net of cash acquired..............................      (21,685)      (13,120)     (35,786)
     Other....................................................................        2,276           211        1,233
                                                                                 ----------  ------------  -----------
          Net cash used for investing activities..............................      (64,872)      (43,638)    (112,909)
                                                                                 ----------  ------------  -----------

Cash flows provided by (used for) financing activities:
     Borrowings under financing agreements, net...............................       16,953        55,192      240,113
     Principal payments under financing agreements............................     (113,720)      (90,708)    (225,441)
     Proceeds from sale of common stock (net).................................       10,049         5,625        5,329
     Purchase of treasury stock...............................................           --            --      (15,330)
                                                                                 ----------  ------------  -----------
          Net cash provided by (used for) financing activities................      (86,718)      (29,891)       4,671
                                                                                 ----------  ------------  -----------
Effect of exchange rate changes on cash.......................................       (1,138)         (291)        (258)

Net increase (decrease) in cash and cash equivalents..........................      (70,941)       45,244      (14,547)
Cash and cash equivalents:
     Beginning of period......................................................       83,117        37,873       52,420
                                                                                 ----------  ------------  -----------
     End of period............................................................   $   12,176  $     83,117  $    37,873
                                                                                 ==========  ============  ===========
Supplemental disclosure of cash information:
     Cash paid during the year for:
        Interest..............................................................   $   17,473  $     20,302  $    16,450
                                                                                 ==========  ============  ===========
        Taxes.................................................................   $   12,643  $     25,389  $    65,686
                                                                                 ==========  ============  ===========
</TABLE>

                            See accompanying notes.

                                       F-5
<PAGE>

                           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.

     Merger

      On May 30, 2000, the Company completed a merger with Varco International,
Inc., a California corporation ("Varco"), by exchanging 46.8 million shares of
its common stock for all of the common stock of Varco (the "Merger"). Each share
of Varco's stock was exchanged for .7125 of one share of the Company's common
stock. In addition, outstanding Varco stock options were converted at the same
exchange ratio into options to acquire approximately 2.2 million shares of the
Company's common stock. In connection with the merger, the Company changed its
name to Varco International, Inc., and its New York Stock Exchange (NYSE) symbol
from "TBI" to "VRC".

      The Merger has been accounted for as a pooling of interests and
accordingly, all prior period consolidated financial statements have been
restated to include the combined results of operations, financial condition and
cash flows of Varco.

      Revenues and net income, before merger and transaction costs related to
the Merger of the separate companies, were as follows (in thousands):

                                                    2000      1999       1998
                                                  --------  --------  ----------
Revenues:
     Tuboscope..................................  $493,791  $385,474  $  567,701
     Varco......................................   372,824   590,374     739,980
                                                  --------  --------  ----------
         Total..................................  $866,615  $975,848  $1,307,681
                                                  ========  ========  ==========
Net income before merger & transaction costs
     related to the merger:
     Tuboscope..................................  $ 23,304  $(7,156)  $   41,945
     Varco......................................    20,147    36,965      60,338
                                                  --------  --------  ----------
         Total..................................  $ 43,451  $ 29,809  $  102,283
                                                  ========  ========  ==========

      In connection with the Merger, the Company incurred $26,570,000 of
transaction costs in the twelve months ended December 31, 2000. Cash and accrued
cash transaction costs included financial advisor fees of $9,714,000,
compensation costs of $4,308,000 and other costs, including legal, accounting
and printing costs of $3,948,000. Non-cash transaction costs included $5,072,000
to fully vest employees participating in the Executive Stock Match Program and
$3,528,000 of equipment rationalization write-offs.

      As a result of the Merger, certain executives and key employees of the
Company may, upon termination of their employment, be entitled to enhanced
severance benefits pursuant to their severance agreements with the Company. It
is not possible to estimate the number of executives or key employees who may
voluntarily or involuntarily terminate their employment with the Company;
accordingly, no amounts have been provided for such payments. The maximum amount
that would be paid pursuant to all such severance agreements is approximately
$16,800,000.

      There were no material transactions between the Company and Varco prior to
the Merger. The effects of conforming Varco's accounting policies to those of
the Company were not material.

     Nature of Business and Risk Factors

      The May 30, 2000 merger of Varco International, Inc. and Tuboscope Inc.
created one of the world's leading drilling equipment and services company. The
combined company carries market leadership positions in each of its four
principal business segments: Drilling Equipment Sales, Tubular Services,
Drilling Services and

                                      F-6
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Coiled Tubing and Wireline Products. The Company provides its customers with the
most comprehensive range of drilling rig equipment and services and tubular
services in the industry. 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, and worldwide oil
and gas inventory levels. Demand for the Company's Drilling Equipment Sales is
largely dependent on the level of offshore drilling activity. 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 quicker service time, and the continuous production of the
well.

      The Company operates in over 49 countries around the world. Its revenues
are geographically concentrated in North America (48%), Latin America (16%),
Europe, Africa, and the Middle East (19%), 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
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 recognizes revenue when goods are shipped or when services are
rendered. On large equipment sales which have multiple completion stages and
where the collection of payment is assured, the Company recognizes revenue under
the percentage of completion method.

     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, 2000 and 1999 except for the Company's $100,000,000 7 1/2% Senior Notes due
2008, which based on information obtained from a national brokerage company were
valued at $95,369,000 and $84,864,000 at December 31, 2000 and 1999.

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

      Accounts receivable are net of allowances for doubtful accounts of
approximately $10,199,000 and $8,373,000 at December 31, 2000 and 1999,
respectively.

                                       F-7
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     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 its Drilling Equipment Sales inventory and the weighted average method for
other inventory.

     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 $44,789,000,
$45,387,000, and $42,345,000 for the years ended December 31, 2000, 1999, and
1998, respectively.

     Identified intangibles

      Identified intangibles are being amortized on a straight-line basis, over
estimated useful lives between 5 and 40 years, and are presented net of
accumulated amortization of approximately $23,544,000 and $20,767,000 at
December 31, 2000 and 1999, respectively. Identified intangibles consist
primarily of technology, patents, trademarks, license agreements, existing
service contracts and covenants not to compete.

     Goodwill

      Goodwill represents the excess of the purchase price over the fair market
value of the net assets acquired. Such excess costs are 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, 2000 and 1999
was approximately $44,904,000 and $36,704,000, respectively. On an annual basis,
the Company estimates the future estimated undiscounted cash flows of the
business to which goodwill related in order to determine that the carrying value
of the goodwill had not been impaired.

     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. 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 cost to sell.

     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

      In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). As amended SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. This statement requires that an
entity recognize all derivatives as either assets

                                      F-8
<PAGE>

                            VARCO INTERNATIONAL, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

or liabilities in the statement of financial position and measure those
instruments at fair value. This statement will be adopted effective January 1,
2001 and is not expected to have a material impact on the Company's financial
position or results of operations.

     Foreign exchange rates

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

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

     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.

     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 1999 and 1998 financial statements have been
reclassified to conform with current year classifications.

3. Acquisitions

     Fiscal 2000

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

     Fiscal 1999

      The Company completed three acquisitions and one asset purchase for an
aggregate purchase price of $20,149,000 consisting of cash of $12,099,000, notes
payable of $638,000, and capital lease obligations assumed of $7,412,000.

     Fiscal 1998

      The Company completed six acquisitions (including the purchase of a
remaining equity interest) and two asset purchases for an aggregate purchase
price of $30,836,000, consisting of cash of $27,336,000 and notes payable of
$3,500,000. In addition, the Company assumed debt of $5,093,000 as part of these
acquisitions.

                                      F-9
<PAGE>

                          VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

<TABLE>
<CAPTION>
                                                                      2000      1999       1998
                                                                      ----      ----       ----
     <S>                                                           <C>        <C>        <C>
     Fair value of assets acquired..............................   $ 26,045   $ 21,327   $ 50,664
     Cash paid..................................................    (21,685)   (13,120)   (35,786)
                                                                   --------   --------   --------
     Liabilities assumed and debt issued........................   $  4,360   $  8,207   $ 14,878
                                                                   ========   ========   ========
     Excess purchase price over fair value of assets acquired...   $  5,175   $  2,434   $ 19,136
                                                                   ========   ========   ========
</TABLE>

      Cash paid in 1999 and 1998 includes $1,021,000 and $8,450,000 for 1998 and
1997 acquisitions, respectively.

      The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if these acquisitions had
occurred at the beginning of 1999. The pro forma information includes certain
adjustments which give effect to amortization of goodwill, interest expense on
acquisition debt and other adjustments, together with related income tax
effects. The pro forma financial information is not necessarily indicative of
the results of operations as they would have been had the transactions been
effected at the beginning of 1999.

                                                             2000        1999
                                                             -----       ----
     Revenue.............................................  $906,220   $1,026,680
                                                           ========   ==========
     Net income .........................................  $ 20,263   $   26,442
                                                           ========   ==========
     Dilutive earnings per common share..................  $    .21   $      .29
                                                           ========   ==========

      In January 2001, the Company acquired all of the outstanding shares of
Quality Tubing, Inc. for total consideration of $55,000,000. The acquisition was
funded by cash and will be accounted for as a purchase. Quality Tubing, Inc.
manufactures coiled tubing used in conjunction with specialized equipment
manufactured by the Company.

4. Inventory

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

                                                             2000        1999
                                                             ----        ----
         Raw materials.................................   $  66,138   $  61,505
         Work in progress..............................      35,445      23,877
         Finished goods................................      63,665      71,781
         Excess of current cost over LIFO value........     (12,898)    (11,962)
                                                          ---------   ---------
            Inventory, net.............................   $ 152,350   $ 145,201
                                                          =========   =========

                                     F-10
<PAGE>

                          VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Property, plant and equipment

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


                                                            2000         1999
                                                            ----         ----
     Land and buildings................................. $ 128,991    $ 129,919
     Operating equipment................................   295,067      278,781
     Rental equipment...................................   154,000      148,585
                                                         ---------    ---------
                                                           578,058      557,285
     Less accumulated depreciation......................  (234,385)    (218,021)
                                                         ---------    ---------
                                                         $ 343,673    $ 339,264
                                                         =========    =========

6. Accrued Liabilities

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

                                                            2000        1999
                                                            ----        ----
     Compensation.......................................  $28,862     $25,193
     Warranty...........................................    6,012       7,431
     Interest...........................................    3,278       5,708
     Other..............................................  $53,271      48,558
                                                          -------     -------
                                                          $91,423     $86,890
                                                          =======     =======

7. Income Taxes

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

                                                     2000       1999      1998
                                                     ----       -----     ----
     U.S. .......................................  $  8,390  $ 33,099  $ 112,576
     Foreign.....................................    37,457    16,963     45,692
                                                   --------  --------  ---------
                                                   $ 45,847  $ 50,062  $ 158,268
                                                   ========  ========  =========

      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):

                                                     2000     1999       1998
                                                     ----     ----       ----
     Current provision:
          U.S. ................................... $ 3,346 $   2,549  $  37,755
          Foreign.................................  15,612    14,928     20,157
                                                   ------- ---------  ---------
               Total current provision............  18,958    17,477     57,912
                                                   ------- ---------  ---------
     Deferred provision (benefit):
          U.S. ...................................   5,045     8,744       (616)
          Foreign.................................     789    (5,968)    (1,311)
                                                   ------- ---------  ---------
               Total deferred provision (benefit).   5,834     2,776     (1,927)
                                                   ------- ---------  ---------
               Total provision (benefit).......... $24,792 $  20,253  $  55,985
                                                   ======= =========  =========

                                     F-11
<PAGE>

                          VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

<TABLE>
<CAPTION>
                                                                        2000       1999       1998
                                                                        ----       ----       ----
     <S>                                                             <C>         <C>        <C>
     Tax expense at federal statutory rate.........................  $  16,046   $ 17,522   $ 55,394
     Incremental effect of foreign operations......................      1,892        695        241
     Nondeductible goodwill amortization and merger related costs..      8,906      3,280      3,725
     State income taxes, net of federal benefit....................        488        612      2,295
     FSC Benefit...................................................       (940)      (676)    (2,021)
     Change in Valuation Allowance.................................       (271)        --     (2,649)
     Other, net....................................................     (1,329)    (1,180)    (1,000)
                                                                     ---------   --------   --------
                                                                     $  24,792   $ 20,253   $ 55,985
                                                                     =========   ========   ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                       2000        1999
                                                                       ----        ----
     <S>                                                             <C>        <C>
     Gross deferred tax assets:
          Receivables..............................................  $  2,106   $  2,377
          U.S. and foreign net operating losses....................     1,910      6,044
          Accrued liabilities and other reserves...................     6,466      5,723
          Inventory reserves and intercompany profit elimination...     3,635      7,863
          Tax credit carry forwards................................     2,368      1,848
          Post retirement benefit obligation.......................     3,967      3,748
                                                                     --------   --------
               Subtotal gross deferred tax assets..................    20,452     27,603
          Valuation allowance......................................      (967)    (1,238)
                                                                     --------   --------
     Net deferred tax assets.......................................    19,485     26,365
                                                                     --------   --------
     Gross deferred tax liabilities:
          Property and equipment...................................    25,339     27,531
          Intangible assets........................................     2,094      1,476
          Reserve for unremitted foreign earnings..................     6,500      6,500
          All other................................................     1,530        783
                                                                     --------   --------
     Gross deferred tax liabilities................................    35,463     36,290
                                                                     --------   --------
     Total net deferred tax liability..............................  $ 15,978   $  9,925
                                                                     ========   ========
</TABLE>

      The total net deferred tax liability at December 31, 2000 is comprised of
$4,889,000 of net current tax assets and $20,867,000 net noncurrent deferred tax
liabilities.

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

      At December 31, 2000 the Company has approximately $10,660,000 of foreign
net operating loss carryforwards. The Company has a valuation allowance of
$967,000 against these net operating losses as the Company believes that the
corresponding deferred tax asset may not be fully realizable. The change in
valuation allowance from 1999 to 2000 was primarily due to the Company's belief
that it is more likely than not that the deferred taxes associated with a
portion of the net operating losses will be utilized. In addition, the Company
has foreign tax credit carryforwards of $2,368,000 which will expire in 2003.

      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-12
<PAGE>

                          VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Long-term Debt

      At December 31, long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                   2000           1999
                                                                                   ----           ----
                                                                                     (in thousands)
          <S>                                                                    <C>           <C>
          $130,000,000 Term Notes payable to lenders, interest at 7.825% at
             December 31, 2000. Principal and interest payable as described
             below through August 6, 2002.....................................   $   26,832    $  69,132
          $100,000,000 Revolving Facility expiring August 6, 2001. Interest
             ranging from 7.25% to 8.5% at December 31, 1999 payable as
             described below..................................................           --       45,900
          $100,000,000 Senior Subordinated Notes, interest at 7.5% payable
             semiannually, principal due on February 15, 2008.................      100,000      100,000
          Other                                                                       9,675       18,303
                                                                                 ----------    ---------
          Total debt                                                                136,507      233,335
          Less: Current maturities............................................       30,347       33,886
                                                                                 ----------    ---------
               Long-term debt.................................................   $  106,160    $ 199,449
                                                                                 ==========    =========
</TABLE>

      Principal payments of long-term debt for years subsequent to 2001 are as
follows (in thousands):

                    2002.............................................. $  2,552
                    2003..............................................    1,142
                    2004..............................................    1,175
                    2005..............................................    1,245
                    Thereafter........................................  100,046
                                                                       --------
                                                                       $106,160
                                                                       ========

     Senior Credit Agreement

      In 1996, the Company entered into a Senior Credit Agreement (the "Credit
Agreement") with a group of lenders which ranks pari passu with all existing and
future senior unsecured obligations of the Company. The Credit Agreement
provides for a $130,000,000 advance/term loan facility (the "term loan
facility"), a $100,000,000 revolving credit facility (the "revolving facility"),
and a $5,000,000 agent swingline facility (the "swingline facility"). The term
loan facility is due in quarterly installments through August 2002. The
revolving facility and swingline facility are due in August 2001.

      At the option of the Company, interest for the term loan facility and the
revolving facility is based upon a floating rate based on either the announced
base rate for a commercial bank or the Eurodollar rate plus an applicable margin
ranging from 0.95% to 1.25%. Commitment fees on the unused portions of the
revolving facility and the swingline facility range from 0.175% to 0.375%.

      The Credit Agreement restricts the Company from paying dividends on its
common stock if the ratio of total funded debt to total capital, as defined,
exceeds 40% (15.7% at December 31, 2000). The Credit Agreement also contains
restrictive covenants with respect to interest coverage, debt to capital ratios
and net worth. The Company believes that it was in compliance with all such
covenants at December 31, 2000.

      At December 31, 2000, the Company had $95,100,000 available on the
revolving credit facility and $2,800,000 available under the swingline facility
after considering outstanding letters of credit of $7,100,000.

     Interest Rate Risk Management

      The Credit Agreement required interest rate protection agreements to be
maintained on at least 50% of the outstanding balance of the term loan facility
until August 6, 1999. Upon expiration of the last of these agreements on May 16,
2000, the Company elected not to enter into any rate protection agreements.

                                     F-13
<PAGE>

                          VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     Senior Subordinated Notes

      On February 25, 1998, the Company issued $100,000,000 of 7 1/2% Senior
Notes due 2008 ("the Senior Notes"). The Senior Notes are fully and
unconditionally guaranteed, on a joint and several basis, by certain direct
wholly-owned subsidiaries of the Company (collectively "Guarantor Subsidiaries"
and individually "Guarantor"). Each of the guarantees is 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 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.

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 20% of compensation, as defined, to these plans.
The participants' contributions were matched either in common stock by the
Company up to a maximum of 4% of compensation or at the discretion of the Board
of Directors, a percentage of net income. Under these plans, Company stock
contributions were approximately $1,269,000 (69,541 shares at an average
transfer price of $18.25), $1,203,000 (111,770 shares at an average transfer
price of $10.76), and $1,569,000 (112,033 shares at an average transfer price of
$14.00), for 2000, 1999, and 1998 respectively. Other contributions to the plans
amounted to $3,452,000, $5,643,000, and $7,584,000 for 2000, 1999, and 1998,
respectively.

      For certain executives, the Company has a supplemental defined benefits
plan providing retirement and death benefits. The plan is unfunded and the net
pension liability was $5,917,432 and $3,623,000 at December 31, 2000 and 1999,
respectively. As a result of the Merger, all participants became fully vested
with full service credit until age 65. Expense under the plan was $1,949,000,
$770,000 and $723,000 in 2000, 1999, and 1998, respectively.

      For certain former employees who retired prior to December 31, 1993,
healthcare and life insurance benefits are provided through insurance companies.
In 1993 the Company adopted FASB Statement No 106, "Accounting for
Postretirement Benefits Other Than Pensions." The transition obligation is being
amortized over 20 years.

      The assumed weighted-average annual rate of increase in the per capita
cost of covered benefits is 8.5% for 2000 and is assumed to decrease gradually
to 5.0% for 2010 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, 2000, by $801,000 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 2000 by $63,000.

      The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 2000 and December
31, 1999.

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

                                                  2000       1999       1998
                                               ---------  ---------  ---------

 Interest cost...............................  $     733  $     669  $     723
 Amortization of transition obligation.......        763        763        763
 Amortization of gain........................       (471)      (534)      (513)
                                               ---------  ---------  ---------
                                               $   1,025  $     898  $     973
                                               =========  =========  =========

                                     F-14
<PAGE>

                          VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

      The following table sets forth the change in benefit obligation of the
Company's retirement benefit plan (in thousands):

                                                          2000         1999
                                                        ---------    ---------

     Benefit obligation at beginning of year........    $  10,634    $  10,356
     Interest cost..................................          733          669
     Benefits paid..................................         (908)        (813)
     Actuarial loss (gain)..........................         (325)         422
                                                        ---------    ---------
     Benefit obligation at end of year..............    $  10,134    $  10,634
     Funded status..................................    $ (10,134)   $ (10,634)
     Unrecognized actuarial (gain)..................       (6,158)      (6,170)
     Unrecognized transition obligation.............        9,143        9,906
                                                        ---------    ---------
     Accrued postretirement benefit obligation......    $  (7,149)   $  (6,898)
                                                        =========    =========

      The Company has an Executive Management Savings Plan and a Directors
Saving Plan (the "Plans") which permit eligible executives and the Company's
non-employee directors to defer a portion of their compensation.

      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):

                                                   2000     1999     1998
                                                   ----     ----     ----
          Service cost..........................   $ 186    $ 202    $ 253
          Interest cost.........................     529      557      604
          Net amortization......................    (352)    (352)    (352)
                                                   -----    -----    -----
               Pension expense..................   $ 363    $ 407    $ 505
                                                   =====    =====    =====

                                     F-15
<PAGE>

                          VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

      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):

                                                                2000     1999
                                                                ----     ----
     Projected benefit obligation at beginning of year....... $ 7,950   $ 8,628
     Service cost............................................     186       202
     Interest cost...........................................     529       557
     Benefits paid...........................................    (197)     (197)
     Exchange rate change....................................    (925)   (1,240)
                                                              -------   -------
     Projected benefit obligation at the end of the year.....   7,543     7,950
     Unrecognized net gain...................................     553       905
                                                              -------   -------
     Pension liability.......................................   8,096     8,855
     Less--amount included in current liabilities............     197       197
                                                              -------   -------
     Noncurrent portion of pension liability................. $ 7,899   $ 8,658
                                                              =======   =======

      The rate of increase in future compensation levels used in determining the
projected benefit obligations was 2% for December 31, 2000, 1999, and 1998. The
discount rate was 7% for December 31, 2000, 1999, and 1998. The unrecognized net
gain from the change in projected compensation levels is being amortized over
ten years.

10. Common Stockholders' Equity

      In 2000, the Board of Directors and stockholders approved an amendment to
the 1996 Equity Participation Plan increasing the number of authorized shares of
common stock to be granted to officers, key employees of the Company, and
non-employee members of the Board of Directors from 3,450,000 to 7,650,000
shares. Options granted under the plan to key employees are generally
exercisable in installments over three years starting one year from the date of
grant and expire ten years from the date of grant. Options granted under the
plan to non-employee members of the Board of Directors are exercisable in
installments over four year periods starting one year from the date of grant and
expire ten years from the date of grant. In connection with the Merger, options
outstanding under previous plans will maintain the terms under which the options
were granted. These terms allow options granted to key employees and
non-employee directors to be exercisable in installments from one to five years
starting one year from the date of grant and expire ten years from the date of
grant.

      The following summarizes options activity:


<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                           ------------------------
                                                       2000          1999          1998
                                                  ------------  ------------   ------------
     <S>                                          <C>           <C>            <C>
     Shares under option at beginning of year...     5,068,068     3,582,989      3,424,212
     Granted....................................       687,443     2,100,112        624,591
     Cancelled..................................     (182,918)     (114,288)       (95,442)
     Exercised..................................   (1,051,975)     (500,745)      (370,372)
                                                  -----------   -----------    -----------
     Shares under option at end of year.........    4,520,618     5,068,068      3,582,989
                                                  -----------   -----------    -----------
     Average price of outstanding options.......  $     11.88   $      8.05    $      7.92
                                                  ===========   ===========    ===========
     Exercisable at end of year.................    3,087,409     2,123,147      1,927,704
                                                  ===========   ===========    ===========
</TABLE>

      The following summarizes information about stock options outstanding as of
December 31, 2000:

<TABLE>
<CAPTION>
                                                                                Options Outstanding      Options Exercisable
                                                                                -------------------      -------------------
                                                     Weighted-Avg.
                   Range of                            Remaining                    Weighted-Avg.                 Weighted-Avg.
               Exercise Price                      Contractual Life      Shares     Exercise Price      Shares    Exercise Price
               --------------                      ----------------      ------     --------------      ------    --------------
     <S>                                           <C>                  <C>         <C>               <C>         <C>
     $ 3.21 to $7.5625....................               5.96           2,315,538        $  6.71      1,981,620        $ 6.57
       8.50 to 18.21......................               7.72           1,644,412          14.80        677,908         14.90
      20.00 to 32.55......................               7.20             560,668          24.65        427,881         24.11
                                                         ----           ---------        -------      ---------        ------
     Totals...............................               6.76           4,520,618        $ 11.88      3,087,409        $10.83
                                                         ====           =========        =======      =========        ======
</TABLE>

                                     F-16
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     For options granted during 2000, 1999, and 1998, the weighted-average fair
value at date of grant was $6.35, $3.61, and $9.54 per option, respectively.
Assuming that the Company had accounted for its stock-based employee
compensations plans using the alternative fair value method, the Company's pro
forma net income would have been $16,275,000, $25,249,000, and $99,136,000 and
pro forma dilutive earnings per share would have been $0.17, $0.27, and $1.06
for 2000, 1999 and 1998, 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
2000, 1999, and 1998, respectively; risk free interest rates of 5.5%; expected
lives of contracts of 3 years; and volatility of 52.9 percent, 54.8 percent, and
50.6 percent.

     In connection with the acquisition of D.O.S. LTD, (the "Drexel Merger") in
1996, the Company issued warrants which were exercised in 2000 and resulted in
the issuance of 2,023,379 shares of common stock.

     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. As of December 31, 2000,
3,355,801 shares have been sold under this plan with a maximum of 4,500,000
shares available for sale under the plan.

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

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

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

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

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

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

                                      F-17
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 2049. These leases generally contain
renewal options and require the lessee to pay maintenance, insurance, taxes and
other operating expenses in addition to the minimum annual rentals. Rental
expense related to operating leases approximated $29,159,000, $27,146,000, and
$26,777,000 in 2000, 1999, and 1998, respectively.

     Future minimum lease commitments under noncancellable operating leases with
initial or remaining terms of one year or more at December 31, 2000 are payable
as follows (in thousands):

   2001........................................................     $16,161
   2002........................................................      10,657
   2003........................................................       7,784
   2004........................................................       4,378
   2005........................................................       2,791
   Thereafter..................................................      12,838
                                                                    -------
       Total future lease commitments..........................     $54,609
                                                                    -------

12. Business Segments And Foreign Operations

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

     Drilling Equipment Sales: This segment manufactures and sells integrated
systems and equipment for rotating and handling pipe on a drilling rig; a
complete line of conventional drilling rig tools and equipment, including pipe
handling tools, hoisting equipment and rotary equipment; pressure control and
motion compensation equipment; and flow devices. Customers include major 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
fiberglass tubulars. Additionally, Tubular Services includes the sale and
leasing 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 oil and gas companies, independent producers, national
oil companies, drilling contractors, oilfield supply stores 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. The
Drilling Services business serves the oilfield drilling markets of North
America, Latin America, Europe, Africa, the Middle East and the Far East.
Customers include major oil and gas companies, independent producers, national
oil companies and drilling contractors.

     Coiled Tubing & Wireline Products: This segment consists of the sale of
highly-engineered coiled tubing equipment, related pressure control equipment,
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

                                      F-18
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 revenue and operating profit (loss) include
revenue from insignificant operations, corporate related expenses and certain
goodwill and identified intangible amortization not allocated to product lines.
Operating profit excludes merger and transaction costs of $26,570,000 associated
with the Merger, $7,808,000 associated with the terminated Newpark merger and
the related alliance agreement, and $2,400,000 related to the write-off of
assets in 2000, 1999, and 1998, respectively.

<TABLE>
<CAPTION>
                                                                                            Coiled
                                                        Drilling                           Tubing &
                                                       Equipment    Tubular    Drilling    Wireline     Other
                                                         Sales      Services   Services    Products  Unallocated    Total
                                                         -----      --------   --------    --------  -----------    -----
                                                                                  (in thousands)
<S>                                                     <C>         <C>        <C>        <C>        <C>            <C>
2000
Revenue..............................................   $283,360    $248,099   $250,229   $  84,927  $        --    $  866,615
Operating profit.....................................     30,193      39,666     39,673      13,895      (35,946)       87,481
Total assets.........................................    223,369     336,243    391,310     106,675       19,385     1,076,982
Capital expenditures.................................      9,750      11,178     22,413         999        1,123        45,463
Depreciation and amortization........................     14,966      13,221     20,345       1,722        6,264        56,518

1999
Revenue..............................................   $504,245    $194,929   $202,518   $  74,156  $        --    $  975,848
Operating profit.....................................     77,662      21,076      8,547       7,084      (39,213)       75,156
Total assets.........................................    254,534     300,672    378,053      92,148      105,906     1,131,313
Capital expenditures.................................     10,488       4,046     13,047       1,645        1,503        30,729
Depreciation and amortization........................     15,904      14,565     18,018       2,186        6,507        57,180

1998
Revenue..............................................   $623,268    $276,952   $286,052   $ 121,409  $        --    $1,307,681
Operating profit.....................................    108,920      60,070     38,048      22,571      (48,147)      181,462
Total assets.........................................    378,628     321,041    380,632     110,771       68,020     1,259,092
Capital expenditures.................................     25,962      22,872     24,813       2,746        1,963        78,356
Depreciation and amortization........................     14,950      12,871     18,080       1,745        5,326        52,972
</TABLE>

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

<TABLE>
<CAPTION>
                                                           2000          1999         1998
                                                           ----          ----         ----
                                                                   (in thousands)
<S>                                                       <C>          <C>           <C>
U.S..................................................     $351,252     $448,950    $  563,628
Canada...............................................       66,916       50,915        63,042
Latin America........................................      140,589      104,416       221,392
United Kingdom.......................................       55,056       58,797        89,965
Other Europe.........................................       89,781      139,752       123,557
Far East.............................................       75,330       91,064       143,178
Other................................................       87,691       81,954       102,919
                                                         ---------     --------    ----------
Total................................................    $ 866,615     $975,848    $1,307,681
                                                         =========     --------    ----------
</TABLE>

                                      F-19
<PAGE>

                           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:

<TABLE>
<CAPTION>
                                                             2000           1999         1998
                                                             ----           ----         ----
                                                                       (in thousands)
<S>                                                         <C>            <C>           <C>
U.S...................................................      $195,695       $192,995      $202,526
Latin America.........................................        47,368         43,205        34,712
Canada................................................        25,886         25,799        28,258
United Kingdom........................................        38,983         40,110        37,503
Netherlands...........................................         9,842         11,345        11,664
Other Europe..........................................        13,014         11,853        13,787
Far East..............................................        11,966         11,958        13,125
Middle East...........................................           919          1,999         1,688
                                                            --------       --------      --------
Total.................................................      $343,673       $339,264      $343,263
                                                            --------       --------      --------
</TABLE>

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

     On February 25, 1998, the Company issued $100.0 million of 7 1/2% Senior
Notes due 2008 ("the Senior Notes"). The Senior Notes are fully and
unconditionally guaranteed, on a joint and several basis, by certain direct
wholly-owned subsidiaries of the Company (collectively "Guarantor Subsidiaries"
and individually "Guarantor"). Each of the guarantees is 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 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. The following condensed consolidating balance sheets as of
December 31, 2000, and 1999 and the related condensed consolidating statements
of income and cash flows for each of the three years in the period ended
December 31, 2000 should be read in conjunction with the notes to these
consolidated financial statements.

                                      F-20
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
                                                                            Year Ended December 31, 2000
                                                                            ----------------------------
                                                           Varco                       Non-
                                                      International,   Guarantor     Guarantor
                                                           Inc.      Subsidiaries  Subsidiaries   Eliminations   Consolidated
                                                           ----      ------------  ------------   ------------   ------------
                                                                                  (In thousands)
<S>                                                    <C>           <C>           <C>            <C>            <C>
CONDENSED CONSOLIDATING
  BALANCE SHEET
Current assets:
     Cash and cash equivalents........................  $       --   $   (2,729)   $  14,905     $          --    $   12,176
     Accounts receivable, net.........................     224,554      375,505      361,106          (691,772)      269,393
     Inventory, net...................................          --      118,552       33,798                --       152,350
     Other current assets.............................       1,174       13,823        6,790                --        21,787
                                                        ----------   ----------    ---------     -------------    ----------
          Total current assets........................     225,728      505,151      416,599          (691,772)      455,706


Investment in subsidiaries............................     736,507      357,804           --        (1,094,311)           --
Property and equipment, net...........................          --      229,557      114,116                --       343,673
Identifiable intangibles, net.........................          --       26,062           --                --        26,062
Goodwill, net.........................................          --      124,489      114,152                --       238,641
Other assets, net.....................................          --       11,379        1,521                --        12,900
                                                        ----------   ----------    ---------     -------------    ----------
          Total assets................................  $  962,235   $1,254,442    $ 646,388     $  (1,786,083)   $1,076,982
                                                        ==========   ==========    =========     =============    ==========

Current liabilities:
     Accounts payable.................................    $101,330   $  415,795    $ 240,829     $    (691,772)   $   66,182
     Accrued liabilities..............................       3,117       65,732       22,574                --        91,423
     Income taxes.....................................          --       (1,673)       6,049                --         4,376
     Current portion of long-term debt................      26,832        3,014          501                --        30,347
                                                        ----------   ----------    ---------     -------------    ----------
          Total current liabilities...................     131,279      482,868      269,953          (691,772)      192,328


Long-term debt........................................      98,973        7,018          169                --       106,160
Other liabilities.....................................          --       28,049       18,462                --        46,511
                                                        ----------   ----------    ---------     -------------    ----------
          Total liabilities...........................     230,252      517,935      288,584          (691,772)      344,999


Common stock..........................................         962           --           --                --           962
Paid in capital.......................................     498,692      434,976      205,747          (640,723)      498,692
Retained earnings.....................................     264,580      301,531      168,978          (470,509)      264,580
Cumulative translation adjustment.....................     (16,921)          --      (16,921)           16,921       (16,921)
Treasury stock........................................     (15,330)          --           --                --       (15,330)
                                                        ----------   ----------    ---------     -------------    ----------
          Total common stockholders' equity...........     731,983      736,507      357,804        (1,094,311)      731,983
                                                        ----------   ----------    ---------     -------------    ----------
          Total liabilities and equity................  $  962,235   $1,254,442    $ 646,388     $  (1,786,083)   $1,076,982
                                                        ==========   ==========    =========     =============    ==========
</TABLE>

                                      F-21
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
                                                                            Year Ended December 31, 1999
                                                                            ----------------------------
                                                           Varco                        Non-
                                                      International,    Guarantor     Guarantor
                                                           Inc.       Subsidiaries  Subsidiaries   Eliminations   Consolidated
                                                           ----       ------------  ------------   ------------   ------------
                                                                                   (In thousands)
<S>                                                   <C>             <C>          <C>             <C>           <C>
CONDENSED CONSOLIDATING
  BALANCE SHEET
Current assets:
     Cash and cash equivalents........................   $       --    $   74,444  $     8,673    $         --    $   83,117
     Accounts receivable, net.........................      222,289       303,896      423,942        (701,640)      248,487
     Inventory, net...................................           --       105,671       39,530              --       145,201
     Other current assets.............................        1,595        11,556       13,383              --        26,534
                                                         ----------    ----------  -----------    ------------    ----------
          Total current assets........................      223,884       495,567      485,528        (701,640)      503,339


Investment in subsidiaries............................      711,596       313,235           --      (1,024,831)           --
Property and equipment, net...........................           --       234,503      104,761              --       339,264
Identifiable intangibles, net.........................           --        28,744           --              --        28,744
Goodwill, net.........................................           --       128,550      113,793              --       242,343
Other assets, net.....................................           --        15,613        2,010              --        17,623
                                                         ----------    ----------  -----------    ------------    ----------
          Total assets................................   $  935,480    $1,216,212  $   706,092    $ (1,726,471)   $1,131,313
                                                         ==========    ==========  ===========    ============    ==========

Current liabilities:
     Accounts payable.................................   $   22,208    $  417,289  $   323,604    $   (701,640)   $   61,461
     Accrued liabilities..............................        5,167        50,870       38,689              --        94,726
     Income taxes.....................................           --          (502)       3,593              --         3,091
     Current portion of long-term debt................       26,000         6,005        1,881              --        33,886
                                                         ----------    ----------  -----------    ------------    ----------
          Total current liabilities...................       53,375       473,662      367,767        (701,640)      193,164


Long-term debt........................................      187,860        10,911          678              --       199,449
Other liabilities.....................................           --        20,043       24,412              --        44,455
                                                         ----------    ----------  -----------    ------------    ----------
          Total liabilities...........................      241,235       504,616      392,857        (701,640)      437,068


Common stock..........................................          926            --           --              --           926
Paid in capital.......................................      475,734       450,238      199,004        (649,242)      475,734
Retained earnings (deficit)...........................      243,525       261,358      124,841        (386,199)      243,525
Cumulative translation adjustment.....................      (10,610)           --      (10,610)         10,610       (10,610)
Treasury stock........................................      (15,330)           --           --              --       (15,330)
                                                         ----------    ----------  -----------    ------------    ----------
          Total common stockholders' equity...........      694,245       711,596      313,235      (1,024,831)      694,245
                                                         ----------    ----------  -----------    ------------    ----------
          Total liabilities and equity................   $  935,480    $1,216.212  $   706,092    $ (1,726,471)   $1,131,313
                                                         ==========    ==========  ===========    ============    ==========
</TABLE>

                                      F-22
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
                                                                            Year Ended December 31, 2000
                                                                            ----------------------------
                                                           Varco                        Non-
                                                      International,   Guarantor      Guarantor
                                                           Inc.       Subsidiaries  Subsidiaries   Eliminations  Consolidated
                                                           ---        ------------  ------------   ------------  ------------
                                                                                   (In thousands)
<S>                                                   <C>             <C>           <C>            <C>           <C>
CONDENSED CONSOLIDATING
STATEMENT OF INCOME
Revenue.............................................       $     --      $599,683       $377,444     $(110,512)    $  866,615
Operating costs.....................................             --       589,802        316,712      (100,810)       805,704
                                                           --------      --------       --------     ---------     ----------
Operating profit....................................             --         9,881         60,732        (9,702)        60,911
Other expenses (income).............................          5,785         4,017           (318)       (9,702)          (218)
Interest expense....................................         13,333         1,437            512            --         15,282
                                                           --------      --------       --------     ---------     ----------
Income (loss) before income taxes...................        (19,118)        4,427         60,538            --         45,847
Provision for income taxes..........................             --         8,391         16,401            --         24,792
Equity in net income of subsidiaries................         40,173        44,137                      (84,310)            --
                                                           --------      --------       --------     ---------     ----------
Net income..........................................       $ 21,055      $ 40,173       $ 44,137     $ (84,310)    $   21,055
                                                           ========      ========       ========     =========     ==========

                                                                            Year Ended December 31, 1999
                                                                            ----------------------------
                                                           Varco                        Non-
                                                      International,   Guarantor      Guarantor
                                                           Inc.       Subsidiaries  Subsidiaries   Eliminations  Consolidated
                                                           ---        ------------  ------------   ------------  ------------
                                                                                   (In thousands)
CONDENSED CONSOLIDATING
STATEMENT OF INCOME
Revenue.............................................       $     --      $687,049       $386,462     $ (97,663)    $  975,848
Operating costs.....................................             --       666,861        339,302       (97,663)       908,500
                                                           --------      --------       --------     ---------     ----------
Operating profit....................................             --        20,188         47,160            --         67,348
Other expenses (income).............................            568        (1,150)        (1,058)           --         (1,640)
Interest expense....................................         16,691         1,605            630            --         18,926
                                                           --------      --------       --------     ---------     ----------
Income (loss) before income taxes...................        (17,259)       19,733         47,588            --         50,062
Provision for income taxes..........................             --        11,292          8,961            --         20,253
Equity in net income of subsidiaries................         47,068        38,627             --       (85,695)            --
                                                           --------      --------       --------     ---------     ----------
Net income..........................................       $ 29,809      $ 47,068       $ 38,627     $ (85,695)    $   29,809
                                                           ========      ========       ========     =========     ==========


                                                                            Year Ended December 31, 1998
                                                                            ----------------------------
                                                           Varco                        Non-
                                                      International,   Guarantor      Guarantor
                                                           Inc.      Subsidiaries   Subsidiaries   Eliminations  Consolidated
                                                           ---        ------------  ------------   ------------  ------------
                                                                                   (In thousands)
CONDENSED CONSOLIDATING
STATEMENT OF INCOME
Revenue.............................................       $     --      $752,743       $703,505     $(148,567)    $1,307,681
Operating costs.....................................            181       666,868        606,720      (145,150)     1,128,619
                                                           --------      --------       --------     ---------     ----------
Operating profit (loss).............................           (181)       85,875         96,785        (3,417)       179,062
Other expenses......................................             --         1,230          3,036        (3,417)           849
Interest expense....................................         14,188         4,926            831            --         19,945
                                                           --------      --------       --------     ---------     ----------
Income (loss) before income taxes...................        (14,369)       79,719         92,918            --        158,268
Provision for income taxes..........................             --        37,139         18,846            --         55,985
Equity in net income of subsidiaries................        116,652        74,072             --      (190,724)            --
                                                           --------      --------       --------     ---------     ----------
Net income..........................................       $102,283      $116,652       $ 74,072     $(190,724)    $  102,283
                                                           ========      ========       ========     =========     ==========
</TABLE>

                                      F-23
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
                                                                               Year Ended December 31, 2000
                                                                               ----------------------------
                                                                 Varco                      Non-
                                                            International,   Guarantor    Guarantor
                                                                 Inc.      Subsidiaries  Subsidiaries  Eliminations  Consolidated
                                                                 ---       ------------  ------------  ------------  ------------
                                                                                           (In thousands)
<S>                                                          <C>           <C>            <C>          <C>           <C>
CONDENSED CONSOLIDATING
  STATEMENT OF CASH FLOWS
Net cash provided by (used for) operating activities:.......    $ 55,689      $ (26,395)    $ 37,231      $ 15,262      $ 81,787
Net cash provided by (used for) investing activities:
Capital expenditures........................................          --        (21,420)     (24,043)           --       (45,463)
Business acquisitions, net of cash acquired.................          --        (15,423)      (6,262)           --       (21,685)
Investments in subsidiaries.................................      15,262             --           --       (15,262)           --
Other   ....................................................          --             --        2,276            --         2,276
                                                                --------      ---------     --------      --------      --------
Net cash provided by (used for) investing activities........      15,262        (36,843)     (28,029)      (15,262)      (64,872)


Net cash used for financing activities:
Net payments under financing agreements.....................     (81,000)       (13,935)      (1,832)           --       (96,767)
Net proceeds from sale of common stock......................      10,049             --           --            --        10,049
                                                                --------      ---------     --------      --------      --------
Net cash used for financing activities......................     (70,951)       (13,935)      (1,832)           --       (86,718)


Effect of exchange rate changes on cash.....................          --             --       (1,138)           --        (1,138)
Net increase (decrease) in cash and cash equivalents........          --        (77,173)       6,232            --       (70,941)
Cash and cash equivalents:
     Beginning of period....................................          --         74,444        8,673            --        83,117
                                                                --------      ---------     --------      --------      --------
     End of period..........................................    $     --      $  (2,729)    $ 14,905      $     --      $ 12,176
                                                                ========      =========     ========      ========      ========
</TABLE>

                                      F-24
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
                                                                                Year Ended December 31, 1999
                                                                                ----------------------------
                                                                 Varco                     Non-
                                                             International,  Guarantor   Guarantor
                                                                 Inc.       Subsidiaries Subsidiaries Eliminations Consolidated
                                                                 ---        ------------ ------------ ------------ ------------
                                                                                           (In thousands)
<S>                                                          <C>            <C>          <C>           <C>         <C>
CONDENSED CONSOLIDATING
  STATEMENT OF CASH FLOWS
Net cash provided by (used in) operating activities:........    $ (5,229)    $ 95,125    $ 10,145     $ 19,023      $119,064
Net cash provided by (used for) investing activities:
Capital expenditures........................................          --      (19,704)    (11,025)          --       (30,729)
Business acquisitions, net of cash acquired.................          --      (11,373)     (1,747)          --       (13,120)
Investments in subsidiaries.................................      19,023           --          --      (19,023)           --
Other   ....................................................          --          211          --           --           211
                                                                --------     --------    --------     --------      --------
Net cash provided by (used for) investing activities........      19,023      (30,866)    (12,772)     (19,023)      (43,638)


Net cash used for financing activities:
Net payments under financing agreements.....................     (19,419)     (14,429)     (1,668)          --       (35,516)
Net proceeds from sale of common stock......................       5,625           --          --           --         5,625
                                                                --------     --------    --------     --------      --------
Net cash used for financing activities......................     (13,794)     (14,429)     (1,668)          --       (29,891)


Effect of exchange rate changes on cash.....................          --           --        (291)          --          (291)
Net increase (decrease) in cash and cash equivalents........          --       49,830      (4,586)          --        45,244
Cash and cash equivalents:
     Beginning of period....................................          --       24,614      13,259           --        37,873
                                                                --------     --------    --------     --------      --------
     End of period..........................................    $     --     $ 74,444    $  8,673     $     --      $ 83,117
                                                                ========     ========    ========     ========      ========
</TABLE>

                                      F-25
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
                                                                              Year Ended December 31, 1998
                                                                              ----------------------------
                                                               Varco                         Non-
                                                          International,   Guarantor      Guarantor
                                                               Inc.      Subsidiaries    Subsidiaries   Eliminations Consolidated
                                                               ----      -------------   -------------  ------------ ------------
                                                                                         (In thousands)
<S>                                                       <C>            <C>             <C>            <C>          <C>
CONDENSED CONSOLIDATING
   STATEMENT OF CASH FLOWS
Net cash provided by (used in) operating
   activities............................................    $ (229,793)    $ 272,736      $ 43,606       $ 7,400     $  93,949
Net cash provided by (used for) investing
   activities:
Capital expenditures.....................................            --       (58,767)      (19,589)           --       (78,356)
Business acquisitions, net of cash acquired..............            --        (9,972)      (25,814)           --       (35,786)
Investments in subsidiaries..............................         7,400            --            --        (7,400)           --
Other....................................................            --            --         1,233            --         1,233
                                                             ----------     ---------      --------       -------     ---------
Net cash provided by (used for) investing
   activities............................................         7,400       (68,739)      (44,170)       (7,400)     (112,909)


Net cash provided by (used for) financing activities:
Net payments under financing agreements..................       232,394      (214,197)       (3,525)           --        14,672
Net proceeds from sale of common stock...................         5,329            --            --            --         5,329
Purchase of treasury stock...............................       (15,330)           --            --            --       (15,330)
                                                             ----------     ---------      --------       -------     ---------
Net cash provided by (used for ) financing
   activities............................................       222,393      (214,197)       (3,525)           --         4,671

Effect of exchange rate changes on cash..................            --            --          (258)           --          (258)
Net decrease in cash and cash equivalents................            --       (10,200)       (4,347)           --       (14,547)
Cash and cash equivalents:
     Beginning of period.................................            --        34,814        17,606            --         52,420
                                                             ----------     ---------      --------       -------     ----------
     End of period.......................................    $       --     $  24,614      $ 13,259       $    --     $  37,873
                                                             ==========     =========      ========       =======     =========
</TABLE>

                                      F-26
<PAGE>

                           VARCO INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

14. Quarterly Financial Information (Unaudited)

    Summarized quarterly financial information for 2000, 1999, and 1998 is as
follows:

<TABLE>
<CAPTION>
                                                                                          Basic       Dilutive
                                                                                        Earnings      Earnings
                                                                                         (Loss)        (Loss)
                                                             Operating       Net           Per          Per
                                                              Profit        Income       Common        Common
                                                 Revenue      (Loss)        (Loss)        Share        Share
                                                 -------      ------        ------        -----        -----
                                                             (In thousands, except for share data)
     <S>                                         <C>         <C>            <C>         <C>           <C>
     2000
     First Quarter.........................      $203,775      $18,602      $  8,768       $ 0.10        $ 0.09
     Second Quarter........................       205,821       (7,233)      (12,593)       (0.14)        (0.14)
     Third Quarter.........................       211,393       21,141        10,815         0.12          0.11
     Fourth Quarter........................       245,626       28,401        14,065         0.15          0.15
                                                 --------      -------      --------       ------        ------
          Total Year.......................      $866,615      $60,911      $ 21,055       $ 0.23        $ 0.22
                                                 ========      =======      ========       ======        ======

     1999
     First Quarter.........................      $247,095      $22,197      $ 12,039       $ 0.13        $ 0.13
     Second Quarter........................       248,084       19,609         9,689         0.11          0.10
     Third Quarter.........................       235,710       19,071         8,823         0.10          0.09
     Fourth Quarter........................       244,959        6,471          (742)       (0.01)        (0.01
                                                 --------      -------      --------       ------        ------
          Total Year.......................      $975,848      $67,348      $ 29,809       $ 0.33        $ 0.32
                                                 ========      =======      ========       ======        ======
</TABLE>

       In connection with the Merger, the Company incurred $26,570,000 of
transaction costs in 2000 during the following quarters: $23,596,000 (second
quarter), $1,164,000 (third quarter), and $1,810,000 (fourth quarter). During
the fourth quarter of 1999, the Company and Newpark Resources Inc. ("Newpark")
announced that they had jointly elected to form operational alliances in key
market areas rather than proceed with the proposed merger which was agreed to in
June 1999. Transaction costs and write-offs of $7,808,000 were incurred in the
fourth quarter of 1999 related to costs associated with the proposed Newpark
merger and the write-off of the Company's investment in its disposal business
which the Company exited as part of its alliance agreement with Newpark.

                                      F-27
<PAGE>

                                                                      SCHEDULE I

                           VARCO INTERNATIONAL, INC.

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                          CONSOLIDATED BALANCE SHEETS
                             (Parent Company Only)

                          December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                                                              December 31,    December 31,
                                                                                                 2000            1999
                                                                                                 ----            ----
                                                                                                     (in thousands)
                                                 ASSETS
                                                 ------
<S>                                                                                           <C>             <C>
Amounts due from affiliates................................................................      $ 222,267        $222,267
Accounts receivable........................................................................          2,287              22
Other assets...............................................................................          1,174           1,595
Investment in subsidiaries.................................................................        736,507         711,596
                                                                                                 ---------        --------
          Total assets.....................................................................      $ 962,235        $935,480
                                                                                                 =========        ========

                                          LIABILITIES AND EQUITY
                                          ----------------------
Amounts due to affiliates..................................................................      $ 101,330        $ 22,208
Interest payable...........................................................................          3,117           5,167
Notes payable..............................................................................        125,805         213,860
Common stockholders' equity:
     Common stock, $.01 par value 200,000,000 shares authorized, 96,245,849
        shares issued and 94,821,149 shares outstanding (92,603,141 shares
        issued and 91,178,441 outstanding at December 31, 1999)............................            962             926

     Paid-in capital.......................................................................        498,692         475,734
     Retained earnings.....................................................................        264,580         243,525
     Cumulative translation adjustment.....................................................        (16,921)        (10,610)
     Less: treasury stock at cost (1,424,700 shares).......................................        (15,330)        (15,330)
                                                                                                 ---------        --------
          Total common stockholders' equity................................................        731,983         694,245
                                                                                                 ---------        --------
          Total liabilities and equity.....................................................      $ 962,235        $935,480
                                                                                                 =========        ========
</TABLE>

                 See notes to condensed financial statements.

                                      S-1
<PAGE>

                                                                      SCHEDULE I

                           VARCO INTERNATIONAL, INC.

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                        CONDENSED STATEMENTS OF INCOME
                             (Parent Company Only)

                   Years ended December 31, 2000, 1999, 1998

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                                     -----------------------
                                                                               2000           1999            1998
                                                                               ----           ----            ----
                                                                                          (in thousands)
     <S>                                                                      <C>             <C>           <C>
     Equity in net earnings of subsidiaries.............................      $ 40,173        $ 47,068      $116,652
     Interest expense...................................................       (13,333)        (16,691)      (14,188)
     Other..............................................................        (5,785)           (568)         (181)
                                                                              --------        --------      --------
     Net income.........................................................      $ 21,055        $ 29,809      $102,283
                                                                              ========        ========      ========
</TABLE>

                 See notes to condensed financial statements.

                                      S-2
<PAGE>

                                                                      SCHEDULE I
                           VARCO INTERNATIONAL, INC.

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                      CONDENSED STATEMENTS OF CASH FLOWS
                             (Parent Company Only)

                   Years ended December 31, 2000, 1999, 1998

<TABLE>
<CAPTION>
                                                                                                Years Ended December 31,
                                                                                                ------------------------
                                                                                             2000          1999         1998
                                                                                             ----          ----         ----
                                                                                                     (in thousands)
<S>                                                                                         <C>         <C>            <C>
Cash flows from operating activities:
     Net income....................................................................         $21,055      $29,809       $102,283
     Adjustments to reconcile net income to net cash provided by
        (used for ) operating activities:
          Equity in net earnings of subsidiaries...................................         (40,173)     (47,068)      (116,652)
          Changes in current assets and liabilities:
               Accounts receivable.................................................          (2,265)         (22)           522
               Income tax receivable...............................................              --        3,154         (3,154)
               Accrued liabilities.................................................              --           --           (355)
               Interest payable....................................................          (2,050)      (1,075)         6,242
               Amounts due from (to) affiliates....................................          79,122        9,973       (218,679)
                                                                                            -------      -------       --------
     Net cash provided by (used for) operating activities..........................          55,689       (5,229)      (229,793)
                                                                                            -------      -------       --------
Cash flows provided by investing activities:
     Investment in subsidiaries....................................................          15,262       19,023          7,400
                                                                                            -------      -------       --------
Cash flows provided by (used for) financing activities:
     Borrowings (payments) under financing agreements, net.........................         (88,055)     (18,655)       233,225
     Other   ......................................................................           7,055         (764)          (831)
     Proceeds from sale of common stock............................................          10,049        5,625          5,329
     Purchase of Treasury Stock....................................................              --           --        (15,330)
                                                                                            -------      -------       --------
     Net cash provided by (used for) financing activities..........................         (70,951)     (13,794)       222,393
                                                                                            -------      -------       --------
Net change in cash and cash equivalents............................................              --           --             --
Cash and cash equivalents:.........................................................              --           --             --
     Beginning of the year.........................................................              --           --             --
                                                                                            -------      -------       --------
     End of year...................................................................         $    --      $    --       $     --
                                                                                            =======      =======       ========
</TABLE>


                        See notes to condensed financial statements.

                                      S-3
<PAGE>

                                                                    SCHEDULE I
                           VARCO INTERNATIONAL, INC.

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                    NOTES TO CONDENSED FINANCIAL STATEMENTS

                         December 31, 2000, 1999, 1998

       No cash dividends were paid to Varco International, Inc.

       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
<PAGE>

                                                                    SCHEDULE II

                           VARCO INTERNATIONAL, INC.

                       VALUATION AND QUALIFYING ACCOUNTS

                   Years ended December 31, 2000, 1999, 1998


<TABLE>
<CAPTION>
                                                                                             Additions
                                                                                            (Deductions)  Charge
                                                                               Balance      Charged to    offs       Balance
                                                                              Beginning     Costs and      and        End of
                                                                               of Year       Expenses     Other        Year
                                                                               -------       --------     ------       ----
                                                                                             (in thousands)
<S>                                                                           <C>            <C>       <C>           <C>
Allowance for doubtful accounts:
     2000...............................................................       $ 8,373        $ 4,895   $ (3,069)    $ 10,199
     1999...............................................................       $ 8,293        $ 2,148   $ (2,068)    $  8,373
     1998...............................................................       $ 5,681        $ 2,476   $    136     $  8,293
Allowance for inventory reserves:
     2000...............................................................       $26,933        $ 5,772   $ (9,372)    $ 23,333
     1999...............................................................       $37,148        $ 6,868   $(17,083)    $ 26,933
     1998...............................................................       $37,279        $ 4,096   $ (4,227)    $ 37,148
Allowance for deferred tax assets:
     2000...............................................................       $ 1,238        $  (271)  $     --     $    967
     1999...............................................................       $ 2,208        $    --   $   (970)    $  1,238
     1998...............................................................       $ 4,857        $(2,649)  $     --     $  2,208
</TABLE>

                                      S-5