OIL STATES INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

COMMISSION FILE NO. 1-16337

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

DELAWARE 76-0476605
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

THREE ALLEN CENTER, 333 CLAY STREET, SUITE 3460, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(713) 652-0582

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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

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

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

State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant:

Voting common stock (as of June 30, 2002)................... $209,037,768

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:

As of February 28, 2003 Common Stock, par value $.01 per share 48,535,283 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement for the 2003 Annual
Meeting of Stockholders, which the Registrant intends to file with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K, are incorporated by reference into Part
III of this Form 10-K.
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TABLE OF CONTENTS

PART I.................................................................. 2
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 17
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II................................................................. 19
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 19
Item 6. Selected Financial Data..................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 33
Item 8. Financial Statements and Supplementary Data................. 34
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 35
PART III................................................................ 35
Item 10. Directors and Executive Officers of the Registrant.......... 35
Item 11. Executive Compensation...................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 35
Item 13. Certain Relationships and Related Transactions.............. 35
Item 14. Controls and Procedures..................................... 35
PART IV................................................................. 35
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 35
SIGNATURES.............................................................. 38
INDEX TO COMBINED, PRO FORMA COMBINED AND CONSOLIDATED FINANCIAL
STATEMENTS.............................................................. 41

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PART I

This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Exchange Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a result of
a number of important factors. For a discussion of important factors that could
affect our results, please refer to "Item 1. Business" including the risk
factors discussed therein and the financial statement line item discussions set
forth in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" below.

ITEM 1. BUSINESS

OUR COMPANY

We are a leading provider of specialty products and services to oil and gas
drilling and production companies throughout the world. We operate in a
substantial number of the world's active oil and gas producing regions,
including the Gulf of Mexico, U.S. onshore, Canada, West Africa, the Middle
East, South America and Southeast Asia. Our customers include many of the major
and independent oil and gas companies and other oilfield service companies. We
operate in three principal business segments, offshore products, tubular
services and well site services, and have established a leadership position in
each.

General information about us can be found at www.oilstatesintl.com. Our
annual report on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K, as well as any amendments and exhibits to those reports, are
available free of charge through our website as soon as reasonably practicable
after we file them with, or furnish them to, the SEC.

OUR BACKGROUND

Oil States International, Inc. was originally incorporated in July 1995 as
CE Holdings, Inc. On August 1, 1995, CE Holdings, Inc. acquired Continental
Emsco Company, an operator of oilfield supply stores, including its then wholly
owned subsidiary Oil States Industries, Inc. (Oil States Industries). Oil States
Industries is a manufacturer of offshore products.

In May 1996, Oil States Industries purchased the construction division of
Hunting Oilfield Services, Ltd., which provides a variety of construction
products and services to the offshore oil and gas industry as well as certain
connector manufacturing technology. In November 1996, CE Holdings, Inc. changed
its name to CONEMSCO, Inc. (Conemsco).

In July 1997, Conemsco purchased HydroTech Systems, Inc., a full service
provider of engineered products to the offshore pipeline industry, and SMATCO
Industries Inc., a manufacturer of marine winches for the offshore service boat
industry. In December 1997, Conemsco purchased Gregory Rig Service & Sales Inc.,
a provider of drilling equipment and services.

In February 1998, Conemsco acquired Subsea Ventures, Inc. (SVI). SVI
designs, manufactures and services auxiliary structures for subsea blowout
preventors and subsea production systems. In April 1998, Conemsco acquired the
assets of Klaper (UK) Limited, a provider of repair and maintenance services for
blowout preventors and drilling risers used in offshore drilling.

In July 2000, Conemsco changed its name to Oil States International, Inc.
In July 2000, Oil States International, Inc., HWC Energy Services, Inc. (HWC),
PTI Group Inc. (PTI) and Sooner Inc. (Sooner) entered into a Combination
Agreement (the Combination Agreement) providing that, concurrently with the
closing of our initial public offering, HWC, PTI and Sooner would merge with
wholly owned subsidiaries of Oil States (the Combination). As a result, HWC, PTI
and Sooner became wholly owned subsidiaries of Oil States in February 2001. In
this Annual Report on Form 10-K, references to the "Company" or to "we," "us,"
"our," and similar terms are to Oil States International, Inc. and its
subsidiaries following the Combination and references to "Oil States" are to Oil
States International, Inc. and its subsidiaries prior to the Combination.

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In 2002, we acquired the following six businesses for total consideration
of approximately $72.0 million, which was financed primarily with borrowings
under our credit facility:

- Southeastern Rentals LLC, based in Mississippi, Edge Wireline Rentals
Inc. and certain affiliated companies, located in Louisiana, and J.V.
Oilfield Rentals & Supply, Inc. and certain affiliated companies, located
in Louisiana, all of which are suppliers of rental tools to the oil and
gas service industry. These businesses were merged into our existing
rental tool business included in our well site services segment.

- Barlow Hunt, Inc., based in Oklahoma, an elastomer molding company which
has become part of our existing elastomer business included in the
offshore products segment.

- Certain assets and related liabilities of Big Inch Marine Services, Inc.,
a Texas-based subsidiary of Stolt Offshore, Inc., which provides subsea
pipeline equipment and repair services similar to those provided by us in
the offshore products segment.

- Applied Hydraulic Systems, Inc., a Louisiana-based offshore crane
manufacturer and crane repair service provider, which has become part of
our offshore products segment.

OUR INDUSTRY

We operate in the oilfield service industry, which provides products and
services to oil and gas exploration and production companies for use in the
drilling for and production of oil and gas. Demand for our products and services
is cyclical and substantially dependent upon activity levels in the oil and gas
industry, particularly our customers' willingness to spend capital on the
exploration and development of oil and gas reserves. Demand for our products and
services by our customers is highly sensitive to current and expected oil and
natural gas prices. See Note 15 to our Consolidated and Combined Financial
Statements included in this Annual Report on Form 10-K for financial information
by segment and a geographical breakout of revenues and long-lived assets.

The years 2001 and 2002 were indicative of the cyclical nature of the
oilfield service business. For our well site services and tubular services
businesses, there was higher activity, as measured by the North American rig
count, during the first eight months of 2001 followed by declining activity
levels, except for seasonal winter peaks in Canadian activity, through the
spring of 2002. The average annual North American rig count declined 27% from
2001 to 2002. Our offshore products business is more influenced by deepwater
development activity and rig construction and repair. Activity in this segment
of our business has increased throughout the years 2001 and 2002.

OFFSHORE PRODUCTS

OVERVIEW

During the year ended December 31, 2002, we generated approximately 31% of
our revenue and 45% of our operating income, before corporate charges, from our
offshore products segment. Through this segment, we design and manufacture
cost-effective, technologically advanced products for the offshore energy
industry. Our products are used in both shallow and deepwater producing regions
and include flex-element technology, advanced connector systems, blow-out
preventor stack integration and repair services, deepwater mooring and lifting
systems, offshore equipment and installation services and subsea pipeline
products. We have facilities in Arlington, Houston and Lampasas, Texas; Houma,
Louisiana; Tulsa, Oklahoma; Scotland; Brazil; England and Singapore that support
our offshore products segment.

OFFSHORE PRODUCTS MARKET

The market for our offshore products and services depends primarily upon
development of infrastructure for offshore production activities, drilling rig
refurbishments and upgrades and new rig construction. As demand for oil and gas
increases and related drilling and production increases in offshore areas
throughout the world, particularly in deeper water, we expect spending on these
activities to increase.

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The upgrade of existing rigs to equip them with the capability to drill in
deeper water, the construction of new deepwater-capable rigs, and the
installation of fixed or floating production systems require specialized
products and services like the ones we provide.

PRODUCTS AND SERVICES

Our offshore products segment provides a broad range of products and
services for use in offshore drilling and development activities. In addition,
this segment provides onshore oil and gas, defense and general industrial
products and services. Our offshore products segment is dependent on continuing
innovation and creative applications of existing technologies.

We design and build manufacturing and testing systems for many of our new
products and services. These testing and manufacturing facilities enable us to
provide reliable, technologically advanced products and services. Our Aberdeen
facility provides structural testing including full-scale product simulations.

Offshore Development and Drilling Activities. We design, manufacture,
fabricate, inspect, assemble, repair, test and market subsea equipment and
offshore vessel and rig equipment. Our products are components of equipment used
for the drilling and production of oil and gas wells on offshore fixed platforms
and mobile production units, including floating platforms and floating
production, storage and offloading vessels, and on other marine vessels,
floating rigs and jack-ups. Our products and services include:

- flexible bearings and connector products;

- subsea pipeline products;

- marine winches, mooring and lifting systems and rig equipment;

- blowout preventor stack assembly, integration, testing and repair
services; and

- other products and services.

Flexible Bearings and Connector Products. We are the principal supplier of
flexible bearings, or FlexJoints(R), to the offshore oil and gas industry. We
also supply connections and fittings that join lengths of large diameter
conductor or casing used in offshore drilling operations. FlexJoints(R) are
flexible bearings that permit movement of riser pipes or tension leg platform
tethers under high tension and pressure. They are used on drilling, production
and export risers and are used increasingly as offshore production moves to
deeper water areas. Drilling riser systems provide the vertical conduit between
the floating drilling vessel and the subsea wellhead. Through the drilling
riser, equipment is guided into the well and drilling fluids are returned to the
surface. Production riser systems provide the vertical conduit from the subsea
wellhead to the floating production platform. Oil and gas flows to the surface
for processing through the production riser. Export risers provide the vertical
conduit from the floating production platform to the subsea export pipelines.
FlexJoints(R) are a critical element in the construction and operation of
production and export risers on floating production systems in deepwater.

Floating production systems, including tension leg platforms, Spars and
FPSO systems, are a significant means of producing oil and gas, particularly in
deepwater environments. We provide many important products for the construction
of these systems. A tension leg platform is a floating platform that is moored
by vertical pipes, or tethers, attached to both the platform and the sea floor.
Our FlexJoint(R) tether bearings are used at the top and bottom connections of
each of the tethers, and our Merlin connectors are used to join shorter pipe
segments to form long pipes offshore. A Spar is a floating vertical cylindrical
structure which is approximately six to seven times longer than its diameter and
is anchored in place.

Subsea Pipeline Products. We design and manufacture a variety of fittings
and connectors used in offshore oil and gas pipelines. Our products are used for
new construction, maintenance and repair applications. New construction fittings
include:

- forged steel Y-shaped connectors for joining two pipelines into one;

- pressure-balanced safety joints for protecting pipelines from anchor
snags or a shifting sea-bottom;

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- electrical isolation joints; and

- hot tap clamps that allow new pipelines to be joined into existing lines
without interrupting the flow of petroleum product.

We provide diverless connection systems for subsea flowlines and pipelines.
Our HydroTech collet connectors provide a high-integrity, proprietary
metal-to-metal sealing system for the final hook-up of deep offshore pipelines
and production systems. They also are used in diverless pipeline repair systems
and in future pipeline tie-in systems. Our lateral tie-in sled, which is
installed with the original pipeline, allows a subsea tie-in to be made quickly
and efficiently using proven HydroTech connectors without costly offshore
equipment mobilization and without shutting off product flow.

We provide pipeline repair hardware, including deepwater applications
beyond the depth of diver intervention. Our products include:

- repair clamps used to seal leaks and restore the structural integrity of
a pipeline;

- mechanical connectors used in repairing subsea pipelines without having
to weld;

- flanges used to correct misalignment and swivel ring flanges; and

- pipe recovery tools for recovering dropped or damaged pipelines.

Marine Winches, Mooring and Lifting Systems and Rig Equipment. We design,
engineer and manufacture marine winches, mooring and lifting systems and rig
equipment. Our Skagit winches are specifically designed for mooring floating and
semi-submersible drilling rigs and positioning pipelay and derrick barges,
anchor handling boats and jack-ups, while our Nautilus marine cranes are used on
production platforms throughout the world. We also design and fabricate rig
equipment such as automatic pipe racking and blow-out preventor handling
equipment. Our engineering teams, manufacturing capability and service
technicians who install and service our products provide our customers with a
broad range of equipment and services to support their operations. Aftermarket
service and support of our installed base of equipment to our customers is also
an important source of revenues to us.

BOP Stack Assembly, Integration, Testing and Repair Services. We design
and fabricate lifting and protection frames and offer system integration of
blow-out preventor stacks and subsea production trees. We can provide complete
turnkey and design fabrication services. We also design and manufacture a
variety of custom subsea equipment, such as riser flotation tank systems, guide
bases, running tools and manifolds. In addition, we also offer blow-out
preventor and drilling riser testing and repair services.

Other Products and Services. We provide equipment for securing subsea
structures and offshore platform jackets, including our Hydra-Lok(R) hydraulic
system. The Hydra-Lok(R) tool, which has been successfully used at depths of
3,000 feet, does not require diver intervention or guidelines.

We also provide cost-effective, standardized leveling systems for offshore
structures that are anchored by foundation piles, including subsea templates,
subsea manifolds and platform jackets.

Our offshore products segment also produces a variety of products for use
in applications other than in the offshore oil and gas industry. For example, we
provide:

- downhole products for onshore drilling and production;

- elastomer products for use in both offshore and onshore oilfield
activities;

- metal-elastomeric FlexJoints(R) used in a variety of military, marine and
aircraft applications; and

- drum-clutches and brakes for heavy-duty power transmission in the mining,
paper, logging and marine industries.

Backlog. Despite strong product shipments in the fourth quarter of 2002,
backlog in our offshore products segment was $100.1 million at December 31,
2002, compared to $72.4 million at December 31, 2001. We expect substantially
all our backlog as of December 31, 2002 will be completed in 2003. Our offshore

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products backlog consists of firm customer purchase orders for which
satisfactory credit or financing arrangements exist and delivery is scheduled.
In some instances, these purchase orders are cancelable by the customer, subject
to the payment of termination fees and/or the reimbursement of our costs
incurred. Our backlog as of any particular date may not be indicative of our
actual operating results for any future period.

REGIONS OF OPERATIONS

Our offshore products segment provides products and services to customers
in the major offshore oil and gas producing regions of the world, including the
Gulf of Mexico, West Africa, the North Sea, Brazil and Southeast Asia.

CUSTOMERS AND COMPETITORS

We market our products and services to a broad customer base, including the
direct end users, engineering and design companies, prime contractors, and at
times, our competitors through outsourcing arrangements.

Our three largest customers in the offshore products markets in 2002 were
BP plc, Noble Drilling, and FMC Technologies, Inc. None of these customers
accounted for greater than 5% of our consolidated revenues. Our main competitors
include ABB Vetco-Gray, Cooper Cameron Corporation, FMC Technologies, Inc., and
Aero International, LLC.

TUBULAR SERVICES

OVERVIEW

On February 14, 2001, the Company completed its acquisition of Sooner.
Sooner's business is reported as our tubular services segment.

During the year ended December 31, 2002, we generated approximately 35% of
our revenue and 9% of our operating income, before corporate charges, from our
tubular services segment. Through this segment, we distribute oil country
tubular goods, or OCTG, and provide associated OCTG finishing and logistics
services to the oil and gas industry. Oil country tubular goods consist of
casing and production tubing. Through our tubular services segment, we:

- distribute premium tubing and casing;

- provide threading, remediation, logistical and inventory services; and

- offer e-commerce pricing, ordering and tracking capabilities.

In 1999, Sooner acquired the tubular divisions of Continental Emsco, Wilson
Supply and National-Oilwell, Inc. These transactions expanded our presence in
key market segments and increased our coverage of the diversified marketplace
for OCTG. We serve a customer base ranging from major oil companies to small
independents. Through our key relationships with more than 20 domestic and
foreign manufacturers of oilfield specialty pipe, we deliver tubular products
and ancillary services to oil and gas companies, drilling contractors and
consultants predominantly in the United States. The OCTG distribution market is
highly fragmented and competitive, and is predominately focused in the United
States.

OCTG MARKET

Our tubular services segment primarily provides casing and tubing. Casing
forms the structural wall in oil and gas wells to provide support and prevent
caving during drilling operations. Casing is used to protect water-bearing
formations during the drilling of a well. Casing is generally not removed after
it has been installed in a well. Production tubing, which is used to bring oil
and gas to the surface, may be replaced during the life of a producing well.

A key indicator of domestic demand for OCTG is the average number of
drilling rigs operating in the United States. The OCTG market at any point in
time is also affected by the level of inventories maintained
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by manufacturers, distributors and end users. In addition, in recent years the
focus of drilling activity has been shifting towards less explored, deeper
geological formations and deepwater locations which offer potentially prolific
reserves. Demand for tubular products is positively impacted by increased
drilling of deeper, horizontal and offshore wells. Deeper wells require
incremental tubular footage and enhanced mechanical capabilities to ensure the
integrity of the well. Premium tubulars are used in horizontal drilling to
withstand the increased bending and compression loading associated with a
horizontal well. Since the cost of a pipe failure is typically higher in an
offshore well than in a land well, offshore operators typically specify premium
tubulars for the completion of offshore wells.

PRODUCTS AND SERVICES

Tubular Products and Services. We distribute various types of OCTG
produced by both domestic and foreign manufacturers to major and independent oil
and gas exploration and production companies and other OCTG distributors. We do
not manufacture any of the tubular goods that we distribute. As a result, gross
margins in this segment are generally lower than those reported by our other
segments. We operate our tubular services segment from a total of eight
facilities and have offices located near areas of oil and gas exploration and
development activity.

In this business, inventory management is critical to our success. We
maintain on-the-ground inventory in 45 yards located in the United States,
giving us the flexibility to fill our customers' orders from our own stock or
directly from the manufacturer. We have a proprietary inventory management
system, designed specifically for the OCTG industry, that enables us to track
our product shipments down to the individual pipe stem.

As a large distributor of tubular goods, we believe that we are able to
negotiate more favorable supply contracts with manufacturers. We have
distribution relationships with most major domestic and international steel
mills.

A-Z Terminal. Our A-Z Terminal pipe maintenance and storage facility in
Crosby, Texas is equipped to provide a full range of tubular services, giving us
strong customer service capabilities. Our A-Z Terminal is on 109 acres, is an
ISO 9002-certified facility and has more than 1,400 pipe racks and two
double-ended thread lines. We have exclusive use of a permanent third-party
inspection center within the facility. The facility also includes indoor chrome
storage capability and patented pipe cleaning machines.

We offer services at our A-Z Terminal facility typically outsourced by
other distributors, including the following: threading, inspection, cleaning,
cutting, logistics, rig returns, installation of float equipment and
non-destructive testing.

Tubular Products and Services Sales Arrangements. We provide our tubular
products and logistics services through a variety of arrangements, including
spot market sales and alliances. The spot market accounted for a majority of our
sales of tubular products and logistics services in the past three years. We
also provide our tubular products and services to independent and major oil and
gas companies under alliance arrangements. Although our alliances are not as
profitable as the spot market, they provide us with more stable and predictable
revenues and an improved ability to forecast required inventory levels, which
allows us to manage our inventory more efficiently.

REGIONS OF OPERATIONS

Our tubular services segment provides tubular products and services to
customers in the United States, the Gulf of Mexico, Canada, Venezuela, Ecuador,
Colombia, Guatemala and the United Kingdom. However, a substantial majority of
our sales are made in the United States, both for land and offshore
applications.

CUSTOMERS, SUPPLIERS AND COMPETITORS

Our three largest end-user customers in the tubular distribution market in
2002 were El Paso Corporation, Conoco Phillips and Burlington Resources. El Paso
Corporation accounted for approximately 6% of our consolidated revenues during
2002. Conoco Phillips and Burlington Resources each accounted for less than 5%
of our consolidated revenues during 2002. Our three largest suppliers were U.S.
Steel Group,
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Maverick Tube Corporation and Lone Star Technologies. The tubular services
distribution market is highly fragmented, and our main competitors are Hunting
Vinson, Red Man Pipe & Supply Co., Inc. and Total Premier.

WELL SITE SERVICES

OVERVIEW

During the year ended December 31, 2002, we generated approximately 34% of
our revenue and 46% of our operating income, before corporate charges, from our
well site services segment. Our well site services segment provides a broad
range of products and services that are used to establish and maintain the flow
of oil and gas from a well throughout its lifecycle. Our services include
workover services, drilling services, rental equipment, work force
accommodations, catering and logistics services and modular building
construction services. We use our fleet of workover and drilling rigs, rental
equipment, work force accommodation facilities and related equipment to service
well sites for oil and natural gas companies. Our products and services are used
in both onshore and offshore applications through the exploration, development,
production and abandonment phases of a well's life. Additionally, our work force
accommodations, catering and logistics services are employed in a variety of
mining and related natural resource applications as well as forest fire
fighting.

WELL SITE SERVICES MARKET

Demand for our workover and drilling rigs, rental equipment and work force
accommodations, catering and logistics services has historically been tied to
the level of expenditures by oil and gas producers which is a function of prices
they receive for oil and gas. We expect activity levels to continue to be highly
correlated to oil and gas prices received by producers.

Demand for our workover services is impacted significantly by offshore
activity both in the United States and international areas. Our hydraulic
workover units compete with jackup rigs and conventional workover rigs for
shallow water workover projects. Our hydraulic workover units can be operated at
a lower cost for most applications than alternatives such as jack-up rigs. Costs
to mobilize and set up our hydraulic workover units, for example, are lower than
alternative equipment. Some operations on oil and gas wells under pressure
situations require the use of a hydraulic workover unit. On the other hand, when
activity levels in the oil and gas business decline, our hydraulic units face
more competition from larger equipment offered at lower prices which can become
more competitive with our equipment.

Our rental equipment fleet which is predominantly located near the U.S.
Gulf of Mexico market, is more production oriented. As a result, demand for our
rental equipment benefits from increased development and workover activities in
the U.S. Gulf Coast area and the Gulf of Mexico. We face competition from many
smaller companies in our rental equipment business in the U.S. Gulf of Mexico
market.

We expect a large portion of incremental spending by oil and gas producers
to be directed toward oil and gas development in the remote locations of Western
Canada and the deepwater areas of the Gulf of Mexico. Our work force
accommodations, catering and logistics business supplies products and services
to companies engaged in operations in these frontier areas.

PRODUCTS AND SERVICES

Workover Services. We provide our workover products and services primarily
to customers in the U.S., Venezuela, the Middle East and West Africa, for both
onshore and offshore applications. Workover products and services are used in
operations on a producing well to restore or increase production. Workover
services are typically used during the development, production and abandonment
stages of the well. Our hydraulic workover units are used for workover
operations and snubbing operations in pressure situations. Our hydraulic
workover rigs are also capable of providing underbalanced drilling and workover
services. Underbalanced drilling and workover can lead to increased rates of
penetration, longer drill bit life and reduced risk of damage

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to the formation. In recent years, oil and gas operators have increasingly
utilized underbalanced services, a trend which we believe will continue in the
future.

A hydraulic workover unit is a specially designed rig used for vertically
moving tubulars in and out of a wellbore using hydraulic pressure. This unit is
used for servicing wells with no pressure at the surface and also has the unique
ability of working safely on wells under pressure. This feature allows these
units to be used for underbalanced drilling and workover and also in well
control applications. When the unit is snubbing, it is pushing pipe or tubulars
into the well bore against well bore pressures. Because of their small size and
ability to work on wells under pressure, hydraulic workover units offer some
advantages over larger workover rigs and conventional drilling rigs.

As of December 31, 2002 we had 27 "stand alone" hydraulic workover units.
Of these 27 units, 15 were located in the U.S., three were located in the Middle
East, five were located in Venezuela and four were located in West Africa.
Typically, our hydraulic workover units are contracted on a short-term dayrate
basis. As a result, utilization of our hydraulic workover units varies from
period to period. As of December 31, 2002, nine of our hydraulic workover units
were working or under contract. The length of time to complete a job depends on
many factors, including the number of wells and the type of workover or pressure
control situation involved. Usage of our hydraulic workover units is also
affected by the availability of trained personnel. With our current level of
trained personnel, we estimate that we have the capability to crew and operate
12 to 13 simultaneous jobs involving our hydraulic workover units.

Our three largest customers in workover services in 2002 were Petroleos de
Venezuela S.A., Chevron Corporation and BP plc. None of these customers
accounted for greater than 5% of our consolidated revenues. Our main competitors
in workover services are Halliburton Company, Cudd Pressure Control, Inc. and
Superior Energy Services.

Drilling Services. Our drilling services business is located in Odessa,
Texas and Wooster, Ohio and provides drilling services for shallow to medium
depths ranging from 2,000 to 9,000 feet. Drilling services are typically used
during the exploration and development stages of a field. We have a total of 15
semi-automatic drilling rigs with hydraulic pipe handling booms and lift
capacities ranging from 200,000 to 300,000 pounds. We added three of these
drilling rigs in 2002. Eleven of these drilling rigs are located in Odessa,
Texas and four are located in Wooster, Ohio. As of December 31, 2002, 12 rigs
were working or under contract. Utilization declined from 91.2% in 2001 to 85.6%
in 2002.

We market our drilling services directly to a diverse customer base,
consisting of both major and independent oil companies. Our largest customers in
drilling services in 2002 included Oxy Permian Ltd., Apache Corporation and
Energen Resources Corporation. None of these customers accounted for greater
than 5% of our consolidated revenues. Our main competitors are Patterson-UTI
Energy Inc., Key Energy Services, Inc. and Union Drilling, Inc. The land
drilling business is highly fragmented and consists of a small number of large
companies and many smaller companies.

Rental Equipment. Our rental equipment business provides a wide range of
products for use in the offshore and onshore oil and gas industry, including:

- wireline and coiled tubing pressure control equipment;

- pipe recovery systems; and

- surface-based pressure control equipment used in production operations.

Our rental equipment are used during the exploration, development,
production and abandonment stages. As of December 31, 2002, we provided rental
equipment at 17 U.S. distribution points in Texas, Louisiana, Oklahoma,
Mississippi, New Mexico and Wyoming, an increase of two locations since December
31, 2001. We provide rental equipment on a day rental basis with rates varying
depending on the type of equipment and the length of time rented.

9

Our three largest customers in rental equipment in 2002 were El Paso
Corporation, Baker Hughes, Inc. and Schlumberger Ltd. El Paso accounted for
approximately 6% of our consolidated revenues during 2002. Baker Hughes and
Schlumberger each accounted for less than 5% of our consolidated revenues.

Work Force Accommodations, Catering and Logistics and Modular Building
Construction. We are a leading provider of fully integrated products and
services required to support a work force at a remote location, including work
force accommodations, food services, remote site management services and modular
building construction. We provide complete design, manufacture, installation,
operation and redeployment logistics services for oil and gas drilling, oil
sands mining, diamond mining, pipeline construction, offshore construction,
disaster relief services or any other industry that requires remote site
logistics projects. Our work force products and services operations are
primarily focused in Canada and the Gulf of Mexico. During the peak of our
operating season, we typically provide logistics services in over 200 separate
locations throughout the world to remote sites with populations ranging from 20
to 2,000 persons.

Work Force Accommodations, Catering and Logistics Services. We sell and
lease portable living quarters, galleys, diners and offices and provide portable
generators, water, sewage systems and catering services as part of our work
force services. We provide various client-specific building configurations to
customers for use in both onshore and offshore applications. We provide our
integrated work force logistics services to customers under long-term and
short-term contractual arrangements.

Modular Building Construction. We design, construct and install a variety
of portable modular buildings, including housing, kitchens, recreational units
and offices for lease or sale to the Canadian and Gulf of Mexico markets. Our
designers work closely with our clients to build structures that best serve
their needs.

In 2002, our three largest customers in work force accommodations, catering
and logistics and modular building construction were Syncrude Canada, Ltd., G.E.
Capital Corporation and Shell Canada Limited. None of these customers accounted
for greater than 5% of our consolidated revenues. Our main competitors are Atco
Structures Limited, Eurest, Ltd., Aramark and Abbeyville Offshore Inc.

EMPLOYEES

As of December 31, 2002, we had approximately 3,460 full-time employees,
39% of whom are in our offshore products segment, 59% of whom are in our well
site services segment and 2% of whom are in our tubular services segment. In
addition, we are party to collective bargaining agreements covering 478
employees located in Canada and the United Kingdom as of December 31, 2002. We
believe relations with our employees are good.

GOVERNMENT REGULATION

Our business is significantly affected by foreign, federal, state and local
laws and regulations relating to the oil and natural gas industry, worker safety
and environmental protection. Changes in these laws, including more stringent
administrative regulations and increased levels of enforcement of these laws and
regulations, could significantly affect our business. We cannot predict changes
in the level of enforcement of existing laws and regulations or how these laws
and regulations may be interpreted or the effect changes in these laws and
regulations may have on us or our future operations or earnings. We also are not
able to predict whether additional laws and regulations will be adopted.

We depend on the demand for our products and services from oil and natural
gas companies. This demand is affected by changing taxes, price controls and
other laws and regulations relating to the oil and gas industry generally,
including those specifically directed to oilfield and offshore operations. The
adoption of laws and regulations curtailing exploration and development drilling
for oil and natural gas in our areas of operation could also adversely affect
our operations by limiting demand for our products and services. We cannot
determine the extent to which our future operations and earnings may be affected
by new legislation, new regulations or changes in existing regulations or
enforcement.

Some of our employees who perform services on offshore platforms and
vessels are covered by the provisions of the Jones Act, the Death on the High
Seas Act and general maritime law. These laws operate to
10

make the liability limits established under states' workers' compensation laws
inapplicable to these employees and permit them or their representatives
generally to pursue actions against us for damages or job-related injuries with
no limitations on our potential liability.

Our operations are subject to numerous foreign, federal, state and local
environmental laws and regulations governing the release and/or discharge of
materials into the environment or otherwise relating to environmental
protection. Numerous governmental agencies issue regulations to implement and
enforce these laws, for which compliance is often costly and difficult. The
violation of these laws and regulations may result in the denial or revocation
of permits, issuance of corrective action orders, assessment of administrative
and civil penalties, and even criminal prosecution. We believe that we are in
substantial compliance with applicable environmental laws and regulations.
Further, we do not anticipate that compliance with existing environmental laws
and regulations will have a material effect on our consolidated financial
statements.

We generate wastes, including hazardous wastes, that are subject to the
federal Resource Conservation and Recovery Act, or RCRA, and comparable state
statutes. The United States Environmental Protection Agency, or EPA, and state
agencies have limited the approved methods of disposal for some types of
hazardous and nonhazardous wastes. Some wastes handled by us in our field
service activities that currently are exempt from treatment as hazardous wastes
may in the future be designated as "hazardous wastes" under RCRA or other
applicable statutes. This would subject us to more rigorous and costly operating
and disposal requirements.

The federal Comprehensive Environmental Response, Compensation, and
Liability Act, or CERCLA or the "Superfund" law, and comparable state statutes
impose liability, without regard to fault or legality of the original conduct,
on classes of persons that are considered to have contributed to the release of
a hazardous substance into the environment. These persons include the owner or
operator of the disposal site or the site where the release occurred and
companies that disposed of or arranged for the disposal of the hazardous
substances at the site where the release occurred. Under CERCLA, these persons
may be subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment. We
currently have operations on properties where activities involving the handling
of hazardous substances or wastes may have been conducted prior to our
operations on such properties or by third parties whose operations were not
under our control. These properties may be subject to CERCLA, RCRA and analogous
state laws. Under these laws and related regulations, we could be required to
remove or remediate previously discarded hazardous substances and wastes or
property contamination that was caused by these third parties. These laws and
regulations may also expose us to liability for our acts that were in compliance
with applicable laws at the time the acts were performed.

The Federal Water Pollution Control Act and analogous state laws impose
restrictions and strict controls regarding the discharge of pollutants into
state waters or waters of the United States. The discharge of pollutants into
jurisdictional waters is prohibited unless the discharge is permitted by the EPA
or applicable state agencies. Many of our properties and operations require
permits for discharges of wastewater and/or stormwater, and we have a system for
securing and maintaining these permits. In addition, the Oil Pollution Act of
1990 imposes a variety of requirements on responsible parties related to the
prevention of oil spills and liability for damages, including natural resource
damages, resulting from such spills in waters of the United States. A
responsible party includes the owner or operator of a facility or vessel, or the
lessee or permittee of the area in which an offshore facility is located. The
Federal Water Pollution Control Act and analogous state laws provide for
administrative, civil and criminal penalties for unauthorized discharges and,
together with the Oil Pollution Act, impose rigorous requirements for spill
prevention and response planning, as well as substantial potential liability for
the costs of removal, remediation, and damages in connection with any
unauthorized discharges.

Some of our operations also result in emissions of regulated air
pollutants. The federal Clean Air Act and analogous state laws require permits
for facilities that have the potential to emit substances into the atmosphere
that could adversely affect environmental quality. Failure to obtain a permit or
to comply with

11

permit requirements could result in the imposition of substantial
administrative, civil and even criminal penalties.

Although we believe that we are in substantial compliance with existing
laws and regulations, there can be no assurance that substantial costs for
compliance will not be incurred in the future. Moreover, it is possible that
other developments, such as the adoption of stricter environmental laws,
regulations and enforcement policies, could result in additional costs or
liabilities that we cannot currently quantify.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

We include the following cautionary statement to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statement made by us, or on our behalf. The factors
identified in this cautionary statement are important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by
us, or on our behalf. You can typically identify forward-looking statements by
the use of forward-looking words such as "may," "will," "could," "project,"
"believe," "anticipate," "expect," "estimate," "potential," "plan," "forecast,"
and other similar words. All statements other than statements of historical
facts contained in this Annual Report on Form 10-K, including statements
regarding our future financial position, budgets, capital expenditures,
projected costs, plans and objectives of management for future operations and
possible future acquisitions, are forward-looking statements. Where any such
forward-looking statement includes a statement of the assumptions or bases
underlying such forward-looking statement, we caution that, while we believe
such assumptions or bases to be reasonable and make them in good faith, assumed
facts or bases almost always vary from actual results. The differences between
assumed facts or bases and actual results can be material, depending upon the
circumstances.

Where, in any forward-looking statement, we, or our management, express an
expectation or belief as to the future results, such expectation or belief is
expressed in good faith and believed to have a reasonable basis. However, there
can be no assurance that the statement of expectation or belief will result or
be achieved or accomplished. Taking this into account, the following are
identified as important factors that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, our company:

- fluctuations in the prices of oil and gas;

- the level of drilling activity;

- the level of offshore oil and gas developmental activities;

- general economic conditions;

- our ability to find and retain skilled personnel;

- the availability of capital; and

- the other factors identified under the captions "Risks Related to Our
Business Generally" and "Risks Related to Our Operations" that follow.

RISKS RELATED TO OUR BUSINESS GENERALLY

DECREASED OIL AND GAS INDUSTRY EXPENDITURE LEVELS WILL ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.

We depend upon the oil and gas industry and its willingness to make
expenditures to explore for, develop and produce oil and gas. If these
expenditures decline, our business will suffer. The industry's willingness to
explore, develop and produce depends largely upon the prevailing view of future
product prices. Many factors affect the supply and demand for oil and gas and
therefore influence product prices, including:

- the level of production;

- the levels of oil and gas inventories;

12

- the expected cost of developing new reserves;

- the cost of producing oil and gas;

- the availability of transportation infrastructure;

- depletion rates;

- the level of drilling activity;

- worldwide economic activity;

- national government political requirements, including the ability of the
Organization of Petroleum Exporting Companies (OPEC) to set and maintain
production levels and prices for oil;

- the impact of armed hostilities involving one or more oil producing
nations;

- the cost of developing alternate energy sources;

- environmental regulation; and

- tax policies.

EXTENDED PERIODS OF LOW OIL PRICES MAY DECREASE DEEPWATER EXPLORATION AND
PRODUCTION ACTIVITY AND ADVERSELY AFFECT OUR BUSINESS.

Our offshore products segment depends on exploration and production
expenditures in deepwater areas. Because deepwater projects are more capital
intensive and take longer to generate first production than shallow water and
onshore projects, the economic analyses conducted by exploration and production
companies typically assume lower prices for production from such projects to
determine economic viability over the long term. If oil prices remain near or
below those levels used to determine economic viability for an extended period
of time, deepwater activity and our business will be adversely affected.

BECAUSE THE OIL AND GAS INDUSTRY IS CYCLICAL, OUR OPERATING RESULTS MAY
FLUCTUATE.

Oil prices have been and are expected to remain volatile. This volatility
causes oil and gas companies and drilling contractors to change their strategies
and expenditure levels. We have experienced in the past, and we may experience
in the future, significant fluctuations in operating results based on these
changes.

DISRUPTIONS IN THE POLITICAL AND ECONOMIC CONDITIONS OF THE FOREIGN COUNTRIES
IN WHICH WE OPERATE COULD ADVERSELY AFFECT OUR BUSINESS.

We have operations in various international areas, including parts of West
Africa, South America and the Middle East. Our operations in these areas
increase our exposure to risks of war, terrorist attacks, local economic
conditions, political disruption, civil disturbance and governmental policies
that may:

- disrupt our operations;

- restrict the movement of funds or limit repatriation of profits;

- lead to U.S. government or international sanctions; and

- limit access to markets for periods of time.

WE MIGHT BE UNABLE TO EMPLOY A SUFFICIENT NUMBER OF TECHNICAL PERSONNEL.

Many of the products that we sell, especially in our offshore products
segment, are complex and highly engineered and often must perform in harsh
conditions. We believe that our success depends upon our ability to employ and
retain technical personnel with the ability to design, utilize and enhance these
products. In addition, our ability to expand our operations depends in part on
our ability to increase our skilled labor force. The demand for skilled workers
is high, and the supply is limited. A significant increase in the wages paid by
competing employers could result in a reduction of our skilled labor force,
increases in the wage rates that we
13

must pay or both. If either of these events were to occur, our cost structure
could increase and our growth potential could be impaired.

THE LEVEL AND PRICING OF TUBULAR GOODS IMPORTED INTO THE UNITED STATES COULD
DECREASE DEMAND FOR OUR TUBULAR GOODS INVENTORY AND ADVERSELY IMPACT OUR
RESULTS OF OPERATIONS. ALSO, IF STEEL MILLS WERE TO SELL A SUBSTANTIAL AMOUNT
OF GOODS DIRECTLY TO CUSTOMERS IN THE UNITED STATES, OUR RESULTS OF OPERATIONS
COULD BE ADVERSELY IMPACTED.

U.S. law currently restricts imports of low-cost tubular goods from a
number of foreign countries into the U.S. tubular goods market, resulting in
higher prices for tubular goods. If these restrictions were to be lifted or if
the level of imported low-cost tubular goods were to otherwise increase, our
tubular services segment could be adversely affected to the extent that we then
have higher-cost tubular goods in inventory. If prices were to decrease
significantly, we might not be able to profitably sell our inventory of tubular
goods. In addition, significant price decreases could result in a longer holding
period for some of our inventory, which could also have a material adverse
effect on our tubular services segment.

We do not manufacture any of the tubular goods that we distribute.
Historically, users of tubular goods in the United States, in contrast to
outside the United States, have purchased tubular goods from a distributor. If
customers were to purchase tubular goods directly from steel mills, our results
of operations could be adversely impacted.

WE ARE SUBJECT TO EXTENSIVE AND COSTLY ENVIRONMENTAL LAWS AND REGULATIONS THAT
MAY REQUIRE US TO TAKE ACTIONS THAT WILL ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.

Our hydraulic well control and drilling operations and our offshore
products business are significantly affected by stringent and complex foreign,
federal, state and local laws and regulations governing the discharge of
substances into the environment or otherwise relating to environmental
protection. We could be exposed to liability for cleanup costs, natural resource
damages and other damages as a result of our conduct that was lawful at the time
it occurred or the conduct of, or conditions caused by, prior operators or other
third parties. Environmental laws and regulations have changed in the past, and
they are likely to change in the future. If existing regulatory requirements or
enforcement policies change, we may be required to make significant
unanticipated capital and operating expenditures.

Any failure by us to comply with applicable environmental laws and
regulations may result in governmental authorities taking actions against our
business that could adversely impact our operations and financial condition,
including the:

- issuance of administrative, civil and criminal penalties;

- denial or revocation of permits or other authorizations;

- reduction or cessation in operations; and

- performance of site investigatory, remedial or other corrective actions.

WE MAY NOT HAVE ADEQUATE INSURANCE FOR POTENTIAL LIABILITIES.

Our operations are subject to many hazards. We face the following risks
under our insurance coverage:

- we may not be able to continue to obtain insurance on commercially
reasonable terms;

- we may be faced with types of liabilities that will not be covered by our
insurance, such as damages from environmental contamination or terrorist
attacks;

- the dollar amount of any liabilities may exceed our policy limits; and

- we may incur losses from interruption of our business that exceed our
insurance coverage.

Even a partially uninsured claim, if successful and of significant size, could
have a material adverse effect on our results of operations or consolidated
financial position.
14

WE ARE SUBJECT TO LITIGATION RISKS THAT MAY NOT BE COVERED BY INSURANCE.

In the ordinary course of business, we become the subject of various
claims, lawsuits and administrative proceedings seeking damages or other
remedies concerning our commercial operations, products, employees and other
matters, including occasional claims by individuals alleging exposure to
hazardous materials as a result of our products or operations. Some of these
claims relate to the activities of businesses that we have sold, and some relate
to the activities of businesses that we have acquired, even though these
activities may have occurred prior to our acquisition of such businesses. We
maintain insurance to cover many of our potential losses, and we are subject to
various self-retentions and deductibles under our insurance. It is possible,
however, that a judgment could be rendered against us in cases in which we could
be uninsured and beyond the amounts that we currently have reserved or
anticipate incurring for such matters.

WE MIGHT BE UNABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN OUR
INDUSTRY.

We sell our products and services in competitive markets. In some of our
business segments, we compete with the oil and gas industry's largest oilfield
services providers. These companies have greater financial resources than we do.
In addition, our business, particularly our tubular services business, may face
competition from Internet business-to-business service providers. Our business
will be adversely affected to the extent that these providers are successful in
reducing purchases of our products and services.

RISKS RELATED TO OUR OPERATIONS

WE ARE SUSCEPTIBLE TO SEASONAL EARNINGS VOLATILITY DUE TO ADVERSE WEATHER
CONDITIONS IN OUR REGIONS OF OPERATIONS.

Our operations are directly affected by seasonal differences in weather in
the areas in which we operate, most notably in Canada and the Gulf of Mexico.
Our Canadian work force accommodations, catering and logistics operations are
significantly focused on the winter months when the winter freeze in remote
regions permits exploration and production activity to occur. The spring thaw in
these frontier regions restricts operations in the spring months and, as a
result, adversely affects our operations and sales of products and services in
the second and third quarters. Our operations in the Gulf of Mexico are also
affected by weather patterns. Weather conditions in the Gulf Coast region
generally result in higher drilling activity in the spring, summer and fall
months with the lowest activity in the winter months. In addition, summer and
fall drilling activity can be restricted due to hurricanes and other storms
prevalent in the Gulf of Mexico and along the Gulf Coast. As a result, full year
results are not likely to be a direct multiple of any particular quarter or
combination of quarters.

WE MIGHT BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.

We rely on a variety of intellectual property rights that we use in our
offshore products and well site services segments, particularly our patents
relating to our FlexJoint(R) technology. We may not be able to successfully
preserve these intellectual property rights in the future and these rights could
be invalidated, circumvented or challenged. In addition, the laws of some
foreign countries in which our products and services may be sold do not protect
intellectual property rights to the same extent as the laws of the United
States. The failure of our company to protect our proprietary information and
any successful intellectual property challenges or infringement proceedings
against us could adversely affect our competitive position.

IF WE DO NOT DEVELOP NEW COMPETITIVE TECHNOLOGIES AND PRODUCTS, OUR BUSINESS
AND REVENUES MAY BE ADVERSELY AFFECTED.

The market for our offshore products is characterized by continual
technological developments to provide better performance in increasingly greater
depths and harsher conditions. If we are not able to design, develop and produce
commercially competitive products in a timely manner in response to changes in
technology, our business and revenues will be adversely affected.

15

LOSS OF KEY MEMBERS OF OUR MANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS.

We depend on the continued employment and performance of Douglas E. Swanson
and other key members of management. If any of our key managers resign or become
unable to continue in their present roles and are not adequately replaced, our
business operations could be materially adversely affected. We do not maintain
"key man" life insurance for any of our officers.

IF WE HAVE TO WRITE OFF A SIGNIFICANT AMOUNT OF GOODWILL, OUR EARNINGS WILL BE
NEGATIVELY AFFECTED.

As of December 31, 2002, goodwill represented approximately 33% of our
total assets. We have recorded goodwill because we paid more for some of our
businesses than the fair market value of the tangible and separately measurable
intangible net assets of those businesses. Current accounting standards, which
were effective January 1, 2002, require a periodic review of goodwill for
impairment in value and a non-cash charge against earnings with a corresponding
decrease in stockholders' equity if circumstances indicate that the carrying
amount will not be recoverable. See Note 3 to our Consolidated and Combined
Financial Statements included in this Annual Report on Form 10-K.

IF WE WERE TO LOSE A SIGNIFICANT SUPPLIER OF OUR TUBULAR GOODS, WE COULD BE
ADVERSELY AFFECTED.

During 2002, we purchased from a single supplier approximately 44% of the
tubular goods we distributed and from three suppliers approximately 70% of such
tubular goods. We do not have contracts with any of these suppliers. If we were
to lose any of these suppliers or if production at one or more of the suppliers
were interrupted, our tubular services segment and our overall business,
financial condition and results of operations could be adversely affected. If
the extent of the loss or interruption were sufficiently large, the impact on us
would be material.

RISKS RELATED TO OUR RELATIONSHIP WITH SCF

L.E. SIMMONS, THROUGH SCF, EFFECTIVELY CONTROLS THE OUTCOME OF STOCKHOLDER
VOTING AND MAY EXERCISE THIS VOTING POWER IN A MANNER ADVERSE TO OUR
STOCKHOLDERS.

SCF-III, L.P. and SCF-IV, L.P., private equity funds that focus on
investments in the energy industry (collectively, "SCF"), together hold
approximately 46% of the outstanding common stock of our company. L.E. Simmons,
the chairman of our board of directors, is the sole owner of L.E. Simmons &
Associates, Incorporated, the ultimate general partner of SCF. Accordingly, Mr.
Simmons, through his ownership of the ultimate general partner of SCF, is in a
position to effectively control the outcome of matters requiring a stockholder
vote, including the election of directors, adoption of amendments to our
certificate of incorporation or bylaws or approval of transactions involving a
change of control. The interests of Mr. Simmons may differ from those of our
stockholders, and SCF may vote its common stock in a manner that may adversely
affect our stockholders.

SCF'S OWNERSHIP INTEREST AND PROVISIONS CONTAINED IN OUR CERTIFICATE OF
INCORPORATION AND BYLAWS COULD DISCOURAGE A TAKEOVER ATTEMPT, WHICH MAY REDUCE
OR ELIMINATE THE LIKELIHOOD OF A CHANGE OF CONTROL TRANSACTION AND, THEREFORE,
THE ABILITY OF OUR STOCKHOLDERS TO SELL THEIR SHARES FOR A PREMIUM.

In addition to SCF's position of effective control, provisions contained in
our certificate of incorporation and bylaws, such as a classified board,
limitations on the removal of directors, on stockholder proposals at meetings of
stockholders and on stockholder action by written consent and the inability of
stockholders to call special meetings, could make it more difficult for a third
party to acquire control of our company. Our certificate of incorporation also
authorizes our board of directors to issue preferred stock without stockholder
approval. If our board of directors elects to issue preferred stock, it could
increase the difficulty for a third party to acquire us, which may reduce or
eliminate our stockholders' ability to sell their shares of common stock at a
premium.

16

TWO OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OR OFFICERS OF SCF. THE RESOLUTION OF THESE CONFLICTS OF INTEREST MAY
NOT BE IN OUR OR OUR STOCKHOLDERS' BEST INTERESTS.

Two of our directors, L.E. Simmons and Andrew L. Waite, are also current
directors or officers of L.E. Simmons & Associates, Incorporated, the ultimate
general partner of SCF. This may create conflicts of interest because these
directors have responsibilities to SCF and its owners. Their duties as directors
or officers of L.E. Simmons & Associates, Incorporated may conflict with their
duties as directors of our company regarding business dealings between SCF and
us and other matters. The resolution of these conflicts may not always be in our
or our stockholders' best interest.

WE HAVE RENOUNCED ANY INTEREST IN SPECIFIED BUSINESS OPPORTUNITIES, AND SCF AND
ITS DIRECTOR NOMINEES ON OUR BOARD OF DIRECTORS GENERALLY HAVE NO OBLIGATION TO
OFFER US THOSE OPPORTUNITIES.

SCF has investments in other oilfield service companies that compete with
us, and SCF and its affiliates, other than our company, may invest in other such
companies in the future. We refer to SCF, its other affiliates and its portfolio
companies as the SCF group. Our certificate of incorporation provides that, so
long as SCF and its affiliates continue to own at least 20% of our common stock,
we renounce any interest in specified business opportunities. Our certificate of
incorporation also provides that if an opportunity in the oilfield services
industry is presented to a person who is a member of the SCF group, including
any of those individuals who also serves as SCF's director nominee of our
Company:

- no member of the SCF group or any of those individuals has any obligation
to communicate or offer the opportunity to us; and

- such entity or individual may pursue the opportunity as that entity or
individual sees fit, unless:

- it was presented to an SCF director nominee solely in that person's
capacity as a director of our company and no other member of the SCF
group independently received notice of or otherwise identified such
opportunity; or

- the opportunity was identified solely through the disclosure of
information by or on behalf of our Company.

These provisions of our certificate of incorporation may be amended only by an
affirmative vote of holders of at least 80% of our outstanding common stock. As
a result of these charter provisions, our future competitive position and growth
potential could be adversely affected.

THE AVAILABILITY OF SHARES OF OUR COMMON STOCK FOR FUTURE SALE COULD DEPRESS OUR
STOCK PRICE

Sales by SCF and other stockholders of a substantial number of shares of
our common stock in the public markets, or the perception that such sales might
occur, could have a material adverse effect on the price of our common stock or
could impair our ability to obtain capital through an offering of equity
securities.

ITEM 2. PROPERTIES

The following table presents information about our principal properties and
facilities. Except as indicated below, we own all of these properties or
facilities.

We have five tubular sales offices and a total of 17 rental tool supply and
distribution points in Texas, Louisiana, New Mexico, Mississippi, Oklahoma and
Wyoming. Most of these office locations provide sales, technical support and
personnel services to our customers. We also have various offices supporting our
business segments which are both owned and leased.

ITEM 3. LEGAL PROCEEDINGS

We are a party to various pending or threatened claims, lawsuits and
administrative proceedings seeking damages or other remedies concerning our
commercial operations, products, employees and other matters, including
occasional claims by individuals alleging exposure to hazardous materials as a
result of our products or operations. Some of these claims relate to matters
occurring prior to our acquisition of businesses, and some relate to businesses
we have sold. In certain cases, we are entitled to indemnification from the
sellers of businesses and in other cases, we have indemnified the buyers of
businesses from us. Although we can give no assurance about the outcome of
pending legal and administrative proceedings and the effect such outcomes may
have on us, we believe that any ultimate liability resulting from the outcome of
such proceedings, to the extent not otherwise provided for or covered by
insurance, will not have a material adverse effect on our consolidated financial
position, results of operations or liquidity.

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

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

PART II

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

COMMON STOCK INFORMATION

Our authorized common stock consists of 200,000,000 shares of common stock.
There were 48,535,283 shares of common stock outstanding as of February 28,
2003, including 580,571 shares of common stock issuable upon exercise of
exchangeable shares of one of our Canadian subsidiaries. These exchangeable
shares, which were issued to certain former shareholders of PTI in the
Combination, are intended to have characteristics essentially equivalent to our
common stock prior to the exchange. For purposes of this Annual Report on Form
10-K, we have treated the shares of common stock issuable upon exchange of the
exchangeable shares as outstanding. The approximate number of record holders of
our common stock as of February 28, 2003 was 66. Our common stock is traded on
the New York Stock Exchange under the ticker symbol OIS. There was no public
market for our common stock before February 9, 2001. The closing price of our
common stock on February 28, 2003 was $11.40 per share.

19

The following table sets forth the range of high and low sale prices of the
Company's common stock.

We have not declared or paid any cash dividends on our common stock since
our initial public offering and do not intend to declare or pay any cash
dividends on our common stock in the foreseeable future. Instead, we currently
intend to retain our earnings, if any, to finance our business and to use for
general corporate purposes. Furthermore, our existing credit facilities restrict
the payment of dividends. Any future determination as to the declaration and
payment of dividends will be at the discretion of our Board of Directors and
will depend on then existing conditions, including our financial condition,
results of operations, contractual restrictions, capital requirements, business
prospects and other factors that our Board of Directors considers relevant.

EQUITY COMPENSATION PLANS

The table below provides information relating to our equity compensation
plans as of December 31, 2002:

We do not have any equity compensation plans not approved by our
stockholders.

20

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data on the following pages include selected
historical and unaudited pro forma financial information of our company as of
and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998. The
following data should be read in conjunction with Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Company's financial statements, and related notes included in Item 8, Financial
Statements and Supplementary Data of this Annual Report on Form 10-K.

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

- ---------------

(1) The unaudited pro forma statements of operations for 1999, 2000 and 2001 and
other financial data give effect to:

- our initial public offering in February 2001 of 10,000,000 shares at
$9.00 per share and the application of the net proceeds to us;

- our issuance of 4,275,555 shares of common stock to SCF in exchange for
approximately $36.0 million of our indebtedness held by SCF (SCF
Exchange) effected in connection with our initial public offering;

- the three-for-one reverse stock split of Oil States common stock effected
in connection with our initial public offering;

- the combination of Oil States, HWC and PTI immediately prior to our
initial public offering, excluding the minority interest of each company,
as entities under common control from the dates such common control was
established using reorganization accounting, which yields results similar
to pooling of interest accounting;

- the acquisition of the minority interests of Oil States, HWC and PTI in
the Combination using the purchase method of accounting as if the
acquisition occurred on January 1, 1999, 2000 and 2001, respectively; and

- the acquisition of Sooner in the Combination using the purchase method of
accounting as if the acquisition occurred on January 1, 1999, 2000 and
2001, respectively.

(2) In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," which we adopted effective January 1, 2002. Under SFAS
142, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized but are subject to annual impairment tests. Accordingly,
beginning in 2002, we no longer amortize goodwill. See "Risks Related to Our
Operations -- If we have to write off a significant amount of goodwill, our
earnings will be negatively affected" in "Item 1. Business" above.

22

(3) Our effective tax rate is affected by our net operating loss carry forwards.
Our 2002 effective tax rate for financial reporting purposes was
approximately 22%. Although there are a number of factors that could affect
it, we currently estimate that our 2003 effective tax rate for financial
reporting purposes will be approximately 29%. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Tax Matters" in this Annual Report on Form 10-K.

(4) EBITDA as defined consists of operating income before goodwill amortization,
depreciation and other amortization expense. EBITDA as defined is not a
measure of financial performance under generally accepted accounting
principles. You should not consider it in isolation from or as a substitute
for net income or cash flow measures prepared in accordance with generally
accepted accounting principles or as a measure of profitability or
liquidity. Additionally, EBITDA as defined may not be comparable to other
similarly titled measures of other companies. We have included EBITDA as
defined as a supplemental disclosure because our management believes that it
provides useful information regarding our ability to service debt and to
fund capital expenditures and provides investors a helpful measure for
comparing our operating performance with the performance of other companies
that have different financing and capital structures or tax rates. We use
EBITDA as defined to compare and to monitor the performance of each of our
segments to other comparable public companies and as a benchmark for the
award of incentive compensation under our annual incentive compensation
plan.

We believe that operating income is the financial measure calculated and
presented in accordance with generally accepted accounting principles that
is most directly comparable to EBITDA as defined. The following table
reconciles EBITDA as defined with our operating income, as derived from our
financial information:

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

You should read the following discussion and analysis together with
"Selected Financial Data" and our financial statements and the notes to those
statements included elsewhere in this Annual Report on Form 10-K.

This discussion contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry.
These forward-looking statements involve risks and uncertainties. Our actual
results could differ materially from those indicated in these forward-looking
statements as a result of certain factors, as more fully described under
"Cautionary Statement Regarding Forward-Looking Statements" in this Form 10-K.
Except to the extent required by law, we undertake no obligation to update
publicly any forward-looking statements, even if new information becomes
available or other events occur in the future.

CRITICAL ACCOUNTING POLICIES

In our selection of critical accounting policies, our objective is to
properly reflect our financial position and results of operations in each
reporting period in a manner that will be understood by those who utilize our
financial statements. Often we must use our judgment about uncertainties.

There are several critical accounting policies that we have put into
practice that have an important effect on our reported financial results.

23

We have contingent liabilities and future claims for which we have made
estimates of the amount of the eventual cost to liquidate these liabilities or
claims. These liabilities and claims sometimes involve threatened or actual
litigation where damages have been quantified and we have made an assessment of
our exposure and recorded a provision in our accounts to cover an expected loss.
Other claims or liabilities have been estimated based on our experience in these
matters and, when appropriate, the advice of outside counsel or other outside
experts. Upon the ultimate resolution of these uncertainties, our future
reported financial results will be impacted by the difference between our
estimates and the actual amounts paid to settle a liability. Examples of areas
where we have made important estimates of future liabilities include litigation,
taxes, postretirement benefits, warranty claims and contract claims.

The determination of impairment on long-lived assets, including goodwill,
is conducted as indicators of impairment are present. If such indicators were
present, the determination of the amount of impairment would be based on our
judgments as to the future operating cash flows to be generated from these
assets throughout their estimated useful lives. Our industry is highly cyclical
and our estimates of the period over which future cash flows will be generated,
as well as the predictability of these cash flows, can have a significant impact
on the carrying value of these assets and, in periods of prolonged down cycles,
may result in impairment charges.

We recognize revenue and profit as work progresses on long-term, fixed
price contracts using the percentage-of-completion method, which relies on
estimates of total expected contract revenue and costs. We follow this method
since reasonably dependable estimates of the revenue and costs applicable to
various stages of a contract can be made. Recognized revenues and profit are
subject to revisions as the contract progresses to completion. Revisions in
profit estimates are charged to income or expense in the period in which the
facts and circumstances that give rise to the revision become known. Provisions
for estimated losses on uncompleted contracts are made in the period in which
losses are determined.

Our valuation allowances, especially related to potential bad debts in
accounts receivable and to obsolescence or market value declines of inventory,
involve reviews of underlying details of these assets, known trends in the
marketplace and the application of historical factors that provide us with a
basis for recording these allowances. If market conditions are less favorable
than those projected by management, or if our historical experience is
materially different from future experience, additional allowances may be
required. We record a valuation allowance to reduce our deferred tax assets to
the amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of our net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise,
should we determine that we would not likely be able to realize all or part of
our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to expense in the period such determination was made.

The selection of the useful lives of many of our assets requires the
judgments of our operating personnel as to the length of these useful lives.
Should our estimates be too long or short, we might eventually report a
disproportionate number of losses or gains upon disposition or retirement of our
long-lived assets. We believe our estimates of useful lives are appropriate.

OVERVIEW

We provide a broad range of products and services to the oil and gas
industry through our offshore products, well site services and tubular services
business segments. Demand for our products and services is cyclical and
substantially dependent upon activity levels in the oil and gas industry,
particularly our customers' willingness to spend capital on the exploration for
and development of oil and gas reserves. Demand for our products and services by
our customers is highly sensitive to current and expected oil and natural gas
prices. Our offshore products segment provides highly engineered and technically
designed products for offshore oil and gas development and production systems
and facilities. Sales of our offshore products and services depend upon the
development of offshore production systems, repairs and upgrades of existing
drilling rigs and construction of new drilling rigs. In this segment, we are
particularly influenced by deepwater drilling and production activities. In our
well site services business segment, we provide hydraulic well control services,

24

pressure control equipment and rental tools, drilling rigs and work force
accommodations, catering and logistics services. Demand for our well site
services depends upon the level of worldwide drilling and workover activity.
Through our tubular services segment, we distribute premium casing and tubing.
Sales of tubular products and services depend upon the overall level of drilling
activity and the types of wells being drilled. Demand for tubular products is
positively impacted by increased drilling of deeper horizontal and offshore
wells that generally require premium tubulars and connectors, large diameter
pipe and longer and additional casing and tubular strings.

Energy and oilfield service activities are highly cyclical, depending upon
crude oil and natural gas pricing, among other things. Beginning in late 1996
and continuing through the early part of 1998, stabilization of oil and gas
prices led to increases in drilling activity as well as the refurbishment and
new construction of drilling rigs. In the second half of 1998, crude oil prices
declined substantially and reached levels below $11 per barrel in early 1999.
With this decline in pricing, many of our customers substantially reduced their
capital spending and related activities. This industry downturn continued
through most of 1999. The price of crude oil and natural gas increased over 1999
levels in 2000 and 2001 due to improved demand for oil, supply reductions by
OPEC member countries and reductions in natural gas storage levels. Crude oil
and natural gas prices decreased significantly from levels reached in early 2001
by the end of 2001. The economic slowdown in the United States and the rest of
the world, moderate weather and the resultant increased inventories of oil and
gas, especially in the United States, contributed to those price declines. With
those price reductions, our customers responded with decreased drilling activity
and spending on exploration and development. In early 2002, oil and gas prices
began to increase and they are currently at relatively high levels. However,
there has not been a corresponding increase in oil service activity given
economic and political uncertainties.

We have a diversified product and service offering which has exposure
throughout the oil and gas cycle. Demand for our tubular services and well site
services is highly correlated to movements in the rig count in the United
States. The table below sets forth a summary of North American rig activity, as
measured by Baker Hughes Incorporated, as of and for the periods indicated.

- ---------------

(1) Canadian rig counts typically increase during the peak winter drilling
season.

The rig count in the United States and Canada, as measured by Baker Hughes
Incorporated, fell from 1,481 rigs in February 1998 to 559 rigs in April 1999.
The downturn in activity in 1998 and 1999 had a material adverse effect on
demand for our products and services, and the results of our operations
decreased significantly. Our business benefited from the improvement in crude
oil and natural gas pricing in 2000 and early 2001 and the resulting increases
in the rig count in 2000 and the first half of 2001. During 2002, the U.S. rig
count decreased in the first half of the year and it has been relatively flat
since then. The U.S. rig count reached its lowest level since 1999 when it
totaled 738 rigs on April 15, 2002. The U.S. rig count has risen since then and
totaled 912 as of February 28, 2003.

We believe that our offshore products segment lagged the general market
recovery in 2000 and 2001 because its sales primarily relate to offshore
construction and production facility development which generally occur later in
the exploration and development cycle. Worldwide offshore construction and
development activity improved in 2002, and backlog in our offshore products
segment increased to $100.1 million at December 31, 2002, compared to $72.4
million at December 31, 2001. Substantially all of our backlog as of December
31, 2002 is expected to be completed by December 31, 2003.

Management believes that fundamental oil and gas supply and demand factors
will lead to increased drilling activity in North America over time. However,
there can be no assurance that these expectations will

25

be realized. We view the recent increases in actual oil and natural gas prices
and reduction in related supplies as important steps toward increased demand for
oilfield service activity.

Although we experienced significant declines in North American drilling
activity during 2002 which impacted our exploration related businesses, we
believe that industry fundamentals are improving and will provide us with strong
growth opportunities.

THE COMBINATION

Prior to our initial public offering in February 2001, SCF-III, L.P. owned
majority interests in Oil States, HWC and PTI, and SCF-IV, L.P. owned a majority
interest in Sooner. L. E. Simmons & Associates, Incorporated is the ultimate
general partner of SCF-III, L.P. and SCF-IV, L.P. L.E. Simmons, the chairman of
our board of directors, is the sole shareholder of L.E. Simmons & Associates,
Incorporated. Immediately prior to the closing of our initial public offering,
the Combination closed and HWC, PTI and Sooner merged with wholly owned
subsidiaries of Oil States. As a result, HWC, Sooner and PTI became our wholly
owned subsidiaries.

The financial results of Oil States, HWC and PTI have been combined for the
three years in the period ended December 31, 2000 as well as the beginning of
calendar 2001 until February 14, 2001 using reorganization accounting, which
yields results similar to the pooling of interests method. The combined results
of Oil States, HWC and PTI form the basis for the discussion of our results of
operations for those periods. The operations of Oil States, HWC and PTI
represent two of our business segments, offshore products and well site
services. Concurrently with the closing of our initial public offering in
February 2001, Oil States acquired Sooner, and the acquisition was accounted for
using the purchase method of accounting. The pro forma financial statements for
the years ended December 31, 2000 and 2001 reflect the acquisition of Sooner
effective as of January 1, 2000 and 2001, respectively. Following the
acquisition of Sooner, we reported under three business segments.

CONSOLIDATED AND PRO FORMA RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO PRO FORMA YEAR ENDED DECEMBER 31,
2001

Revenues. Revenues decreased $102.9 million, or 14.3%, during the year
ended December 31, 2002 to $616.8 million compared to the year ended December
31, 2001. Revenues in our well site services segment decreased $30.0 million, or
12.5%, in the year ended December 31, 2002 compared to the previous year. Within
well site services, comparing the year 2002 to the year 2001, our work force
accommodations, catering and logistics services and modular building
construction services revenues decreased $18.5 million, or 13.6%, due to lower
activity in Canada and the U.S. Gulf of Mexico, our land drilling revenues
decreased $3.1 million, or 10.1%, due to lower activity and drilling rates,
primarily in West Texas, our rental tool services revenues decreased $0.3
million, or 0.8%, because lower activity in our U.S. Gulf of Mexico locations
was partially offset by the impact of acquisitions made by the Company in March
and August 2002 and our workover services revenues decreased $8.1 million, or
21.8%, as activity, especially in the U.S. Gulf of Mexico, decreased compared to
2001. Our offshore products segment revenues increased $61.3 million, or 47.4%,
in the year 2002 compared to the year 2001, due to significantly increased
activity supporting offshore production facility construction, primarily in
deepwater locations. Our tubular services segment revenues in the year 2002 were
$134.2 million, or 38.3%, lower than in the year 2001 because of decreased
drilling activity in the United States and significantly lower foreign sales in
2002 compared to 2001.

Cost of Sales. Cost of sales decreased $95.9 million, or 16.4%, to $487.0
million in the year 2002 compared to the previous year. The cost of sales
decrease was primarily due to decreased tubular services sales partially offset
by higher costs at our offshore products segment. Tubular services cost of sales
decreased $125.9 million, or 38.3%, in the year 2002 compared to the year 2001
and our offshore products segment cost of sales increased $37.9 million, or
38.0%, in the year 2002 compared to the year 2001.

Gross Margins. Our gross margins, which we calculate before a deduction
for depreciation and amortization expense, decreased $7.0 million, or 5.1%, to
$129.8 million in the year 2002 compared to the year 2001. Our gross margin as a
percent of revenue improved from 19.0% in the year 2001 to 21.0% in 2002 due to
a more favorable mix of our revenues consisting of higher margin offshore
products and well site services activities with less of our 2002 revenues
consisting of tubular sales. Our offshore products' gross margins increased
$23.4 million, or 79.3%, in the year 2002 compared to the year 2001 and our
gross margin percentage increased to 27.8% in the year 2002 compared to 22.8% in
the year 2001 as higher volumes of product shipments lead to increased operating
efficiencies in the year 2002. Our well site services gross margins decreased
$23.1 million, or 26.8%, to $63.1 million in the year 2002 compared to the year
2001. The gross margin percentage for well site services declined to 30.1% in
the year 2002 compared to 35.9% in 2001. Within our well site services segment,
our land drilling business gross margins decreased $5.1 million, or 44.7%, to
$6.3 million in 2002 compared to total gross margin of $11.4 million in 2001
because of decreased drilling activity and lower prices obtained for drilling
services; our rental tool business reported 2002 gross margins totaling $18.4
million, or 51.5% of revenue, compared to 2001 gross margins totaling $18.9
million, or 52.5% of revenue in 2001 as we saw increased price competition for
rental tools which offset the positive effect of our 2002 rental tool business
acquisitions; our workover services gross margins in the year 2002 totaled $8.7
million, or 30.3% of revenues, compared to 2001 gross margins of $13.4 million,
or 36.1% of revenues, as decreased U.S. Gulf of Mexico margins and activity more
than offset the positive effect of higher international activity; and our work
force accommodations, catering and logistics services and modular building
construc-

27

tion services businesses gross margin decreased in 2002 to $29.6 million, or
25.2% of revenue, compared to $42.4 million, or 31.2% of revenue, in the
previous year because of the impact of lower drilling activity in 2002 in Canada
and the U.S. Gulf of Mexico and because a greater percentage of revenues
resulted from relatively low margin construction activity. Our tubular services
margins in the year 2002 totaled $13.8 million, a decrease of $8.3 million, or
37.6%, compared to the year 2001. While tubular services gross margins were
approximately the same in each of the last two years, the volume of tubular
products shipped in 2002 decreased by approximately 29% compared to 2001.

Selling, General and Administrative Expense. During the year 2002,
selling, general and administrative expenses (SG&A) increased $0.6 million, or
1.2%, to $51.8 million from $51.2 million in the year 2001. As a percent of
revenues, SG&A increased to 8.4% in 2002 compared to 7.1% in 2001. Increased
costs in the year 2002 compared to 2001 at our offshore products segment, driven
by higher activity and increased employee incentive costs were only partially
offset by lower well site services segment costs associated with decreased
activity within that segment.

Depreciation and Amortization. Depreciation and amortization expense
totaled $23.3 million in the year 2002 compared to $28.7 million in 2001. The
$5.4 million decrease is principally related to the elimination of goodwill
amortization in 2002 (in comparison, we amortized $7.5 million of goodwill in
the year 2001) partially offset by additional depreciation and amortization
associated with capital additions and intangibles recorded as part of business
acquisitions in the years 2001 and 2002.

Operating Income. Our operating income represents revenues less (i)
product costs, (ii) service and other costs, (iii) SG&A, and (iv) depreciation
and amortization plus other operating income. Our operating income decreased
$2.7 million, or 4.7%, to $54.6 million for 2002 from $57.3 million in 2001.
Operating income from our well site services segment decreased $20.0 million
from $47.4 million for 2001 to $27.4 million for 2002. Operating income for our
offshore products segment increased $20.7 million to $27.3 million for 2002
compared to $6.6 million in 2001. Operating income in our tubular services
segment decreased $7.1 million from $12.5 million in 2001 to $5.4 million in
2002. Corporate/other operating loss improved from a loss of $9.2 million in
2001 to a loss of $5.5 million in 2002 primarily because of the discontinuance
of goodwill amortization in 2002.

Net Interest Expense. Net interest expense totaled $4.4 million in the
year 2002, a decrease of $4.0 million, or 47.6%, compared to net interest
expense of $8.4 million in 2001. Both interest rates and average debt balances
were lower during 2002 when compared to 2001.

Income Tax Expense. Our income tax expense totaled $11.4 million, or 22.3%
of pretax income, in the year 2002 compared to $2.1 million, or 4.3% of pretax
income in the year 2001. The increased tax expense is primarily due to the
higher effective tax rate which increased in 2002 compared to 2001 as a result
of a lower amount of net operating loss carryforwards available to offset
taxable income. We expect our effective tax rate to increase to approximately
29% for the full year 2003.

PRO FORMA YEAR ENDED DECEMBER 31, 2001 COMPARED TO PRO FORMA YEAR ENDED
DECEMBER 31, 2000

Revenues. Pro forma revenues increased by 20.8% from $595.6 million during
the year ended December 31, 2000 to $719.7 million during 2001. Revenues from
our well site services segment increased $49.9 million, or 26.3%, to $239.8
million of which $24.0 million was generated from our work force accommodations,
catering and logistics services and modular building construction services, $9.1
million was generated from our rental tool business, $11.7 million was generated
from our land drilling operations and $5.1 million was generated from our
hydraulic workover operations. Increases in Canadian drilling activity, oil
sands development activity and strong Gulf of Mexico accommodations activity
drove the increase in revenues in our work force accommodations, catering and
logistics and modular building construction services. The increase in revenues
from our rental tool operations was due to increased equipment available to rent
and two small acquisitions completed in the third quarter of 2001. Increases in
revenues from our land drilling services were due to improvements in utilization
and pricing from the year 2000 to the year 2001. Increased foreign activity and
higher pricing contributed to our hydraulic workover improvement in 2001
compared to 2000. Our tubular services revenues increased $59.5 million, or
20.4%, as a direct result of increased drilling activity over
28

the period. In addition, tubular services revenues in the fourth quarter of 2001
benefited from a large one-time sale of inventory held in international
locations pursuant to two scheduled contract terminations. Such international
sales totaled $17.1 million and $51.5 million in 2000 and 2001, respectively.
One of these contracts expired on March 31, 2002 and the other expired on June
30, 2002. The remaining $14.7 million increase in revenues was generated by our
offshore products segment. This year over year increase in revenues was
generated by increased demand for our bearings and connector products and
certain fabrication work.

Cost of Sales. Pro forma cost of sales increased $100.2 million, or 20.8%,
to $582.9 million for the year ended December 31, 2001 from $482.7 million for
the year ended December 31, 2000. The cost of sales increase was due to
increased activity at each of our operating segments and other factors
influencing revenues. Cost of sales increased in our well site services, tubular
services and offshore products segments by $29.4 million, $63.5 million and $6.4
million, respectively.

Gross Margin. Our pro forma gross margins, which we calculate before a
deduction for depreciation and amortization expense, increased $23.8 million
from $113.0 million in 2000 to $136.8 million in 2001. Our gross margin
percentage was consistent in 2000 and 2001 at 19.0% due to an improvement in our
offshore products and well site services segments, offset by declines in our
tubular services gross margin percentages. Offshore products' gross margin
increased from $21.2 million in 2000 to $29.5 million in 2001, an increase of
$8.3 million, or 39.2%. Our gross margin percentage in this segment increased
from 18.5% in 2000 to 22.8% in 2001. This gross margin increase was due to
improved revenues and margins related to our BOP stack integration and repair
services as well as increased demand for our flexible bearings and connector
products. We also had improved margins related to the manufacturing of rig and
vessel equipment. Our well site services gross margins increased from $65.7
million in 2000 to $86.2 million in 2001, an increase of $20.5 million, or
31.2%. Our gross margin percentage in this segment increased from 34.6% in 2000
to 35.9% in 2001. Within our well site services segment, land drilling
contributed $7.2 million of the margin increase as both utilization of our rigs
and average revenues per day worked increased in 2001 compared to 2000. Our work
force accommodations, catering and logistics services and modular building
construction services was responsible for an improvement in gross margin of $6.4
million due to increased activity, especially in the U.S. Gulf of Mexico
operations, increased equipment available to rent as a result of capital
expenditures and increased activity in the oil sands development areas in
northern Alberta, Canada. Our rental tool operations contributed margin
improvement of $4.9 million. This increase in gross margin was principally
related to the increase in revenues discussed above. Our hydraulic workover
operations gross margins increased $2.0 million in 2001 compared to 2000 as a
result of increased activity, especially in foreign locations. Tubular Services
gross margins decreased from $26.1 million, or 9.0% of revenues, during 2000 to
$22.1 million, or 6.3% of revenues during 2001, a decrease of $4.0 million, or
15.3%. Our tubular services segment suffered margin declines during the last
half of 2001 due to general market declines and our decision to aggressively
reduce inventory levels in anticipation of a weakening market. This margin
decline occurred despite a liquidation of our international tubular inventories
during the fourth quarter of 2001. Gross margin from international sales totaled
$2.8 million and $6.6 million in 2000 and 2001, respectively. The negative gross
margin for corporate/other is due to recognition of unallocated insurance
expense at the corporate level.

Selling, General and Administrative Expenses. During the year ended
December 31, 2001, pro forma selling, general and administrative (SG&A) expenses
increased $5.0 million, or 10.8%, to $51.1 million from $46.1 million during
2000. As a percent of revenues, SG&A expenses declined to 7.1% in 2001 from 7.7%
in 2000. SG&A expenses increased by $2.4 million, or 12.1%, in our well site
services segment due to headcount increases in support of increased market
activity and higher incentive pay, which is based upon our EBITDA performance.
Corporate headquarters charges were up $2.8 million due to the establishment of
a new corporate headquarters office.

Depreciation and Amortization. Pro forma depreciation and amortization
increased $2.0 million to a total of $28.7 million for the year ended December
31, 2001. The 7.5% increase was primarily due to acquisitions and capital
expenditures made in our well site services segment during 2000 and 2001.

Operating Income. Our pro forma operating income represents revenues less
(i) product costs, (ii) service and other costs, (iii) SG&A and (iv)
depreciation and amortization, plus other operating income.

29

Our operating income increased $17.1 million, or 42.5%, to $57.3 million for the
year ended December 31, 2001 from $40.2 million during 2000. Operating income
from our well site services segment increased $16.6 million from $30.8 million
for the year ended December 31, 2000 to $47.4 million during 2001. Operating
income for our tubular services segment decreased $4.2 million to $12.5 million
for the year ended December 31, 2001 from $16.7 million during 2000. Operating
income in our offshore products segment increased $8.2 million to $6.6 million
for the year ended December 31, 2001 from an operating loss of $1.6 million
during 2000.

Net Interest Expense. Net pro forma interest expense totaled $8.4 million
for the year ended December 31, 2001 compared to $9.3 million during 2000. The
$0.9 million reduction in net interest expense was primarily related to lower
interest rates, partially offset by an increase in average debt balances
outstanding. Average debt balances were higher in 2001 as a result of
refinancing of certain preferred stock issues in February 2001.

Income Tax Expense. Pro forma income tax expense totaled $2.1 million
during 2001 compared to $4.5 million during 2000. The decrease of $2.4 million,
and the corresponding low effective tax rate, was primarily due to a reduction
in the valuation allowance applied against tax assets, primarily net operating
losses (NOL's), due to expected tax benefits resulting from the Combination. We
adjusted such valuation allowance because we determined that it was more likely
than not that the deferred tax assets would be realized.

Minority Interest. Minority interest was immaterial during the years ended
December 31, 2001 and 2000. Substantially all of the minority interests were
acquired, and therefore reduced, in connection with the Combination.

CONSOLIDATED AND COMBINED RESULTS OF OPERATIONS

Prior to the Sooner acquisition in February 2001, we reported under two
business segments, offshore products and well site services. Information for
these two segments, which represent the combined results of Oil States, HWC and
PTI using reorganization accounting, is presented in our consolidated financial
statements included in this Annual Report on Form 10-K. Subsequent to the
February 2001 acquisition of Sooner and the Combination, we reported under the
three business segments discussed above.

We believe that the pro forma results of operations discussed above reflect
the components of our current business operations and capital structure. For a
discussion of our consolidated and combined results of operations, please refer
to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001
filed with the Securities and Exchange Commission on March 4, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are to fund capital expenditures, such as
expanding and upgrading our manufacturing facilities and equipment, increasing
our rental tool and workover assets, increasing our work force accommodation
units, funding new product development and general working capital needs. In
addition, capital is needed to fund strategic business acquisitions. Our primary
sources of funds have been cash flow from operations, proceeds from borrowings
under our bank facilities and private and public capital investments.

Cash was provided by operations during the years ended December 31, 2002
and 2001 in the amounts of $45.4 million and $55.1 million, respectively. Cash
provided by operations in 2002 was generated by net income plus non-cash charges
partially offset by working capital increases for purchases of inventory at our
offshore products and tubular services segments. During the last half of 2002,
our tubular inventories increased $22.1 million, or 57%, as we purchased
inventory in anticipation of increased future demand for tubular products from
exploration and production companies and other tubular distributors. Offshore
products inventories increased in 2002 compared to 2001 because of increased
activity in that segment.

Cash used by investing activities in 2002 totaled $89.4 million compared to
$22.7 million in 2001. Capital expenditures in 2002 were $26.1 million and
related principally to our well site services segment ($19.3 mil-
30

lion) and offshore products segment ($6.6 million). We spent cash totaling $64.8
million on six acquisitions. See Note 5 to our Consolidated and Combined
Financial Statements included in this Annual Report on Form 10-K.

We currently expect to spend a total of approximately $35.0 million during
2003 to upgrade our equipment and facilities and expand our product and service
offerings. We expect to fund these capital expenditures with internally
generated funds.

Capital expenditures totaling $29.7 million during the year ended December
31, 2001 consisted principally of purchases of assets for our well site services
businesses.

Net cash of $50.4 million was provided by financing activities during the
year ended December 31, 2002, primarily as a result of borrowings under our bank
credit facility to fund our capital expenditures and acquisitions.

Net cash of $32.4 million was used in financing activities during the year
ended December 31, 2001, primarily as a result of debt and preferred stock
repayments, partially offset by net proceeds from our initial public offering.

The following summarizes our debt and lease obligations at December 31,
2002 (in thousands):

Our debt obligations at December 31, 2002 are included in our consolidated
balance sheet, which is a part of our consolidated financial statements included
in this Annual Report on Form 10-K. We have not entered into any material leases
or off balance sheet arrangements subsequent to December 31, 2002.

With the proceeds received in our initial public offering completed in
February 2001, we repaid $43.7 million of outstanding subordinated debt,
redeemed $21.8 million of preferred stock of Oil States, paid accrued interest
on subordinated debt and accrued dividends on preferred stock aggregating $7.1
million, and repurchased common stock from non-accredited shareholders and
shareholders holding pre-emptive stock purchase rights for $1.6 million. The
balance of the proceeds were used to reduce amounts outstanding under bank lines
of credit. Concurrently with the closing of our initial public offering, we
issued 4,275,555 shares of common stock in the SCF Exchange.

Concurrently with our initial public offering, we also entered into a $150
million senior secured revolving credit facility which was increased to $168
million of availability in December 2002. Up to $45.0 million of commitments
under the credit facility are available in the form of loans denominated in
Canadian dollars and may be made to our principal Canadian operating
subsidiaries. This credit facility replaced existing credit facilities. The
facility was extended during the fourth quarter of 2002 and matures on January
25, 2005, unless extended for an additional one year period with the consent of
the lenders. Amounts borrowed under this facility bear interest, at our
election, at either:

- a variable rate equal to LIBOR (or, in the case of Canadian dollar
denominated loans, the Bankers' Acceptance discount rate) plus a margin
ranging from 1.75% to 3.0%; or

- an alternate base rate equal to the higher of the bank's prime rate and
the federal funds effective rate plus 0.5% (or, in the case of Canadian
dollar denominated loans, the Canadian Prime Rate) plus a margin ranging
from 0.75% to 2.0%, depending upon the ratio of total debt to EBITDA (as
defined in the credit facility and which differs from the definition of
EBITDA as defined generally used by us, as set forth in Note 4 of "Item
6. Selected Financial Data" above).

We pay commitment fees of 0.5% per year on the undrawn portion of the
facility.

31

Commitments under our credit facility will be permanently reduced, and
loans prepaid, by an amount equal to 100% of the net cash proceeds of all
non-ordinary course asset sales and the issuance of additional debt and by 50%
of the issuance of equity securities. Mandatory commitment reductions will be
allocated pro rata based on amounts outstanding under the U.S. dollar
denominated facility and the Canadian dollar denominated facility. In addition,
voluntary reductions in commitments are permitted.

Our credit facility is guaranteed by all of our active domestic
subsidiaries and, in some cases, our Canadian and other foreign subsidiaries.
Our credit facility is secured by a first priority lien on all our inventory,
accounts receivable and other material tangible and intangible assets, as well
as those of our active subsidiaries. However, no more than 65% of the voting
stock of any foreign subsidiary is required to be pledged if the pledge of any
greater percentage would result in adverse tax consequences.

Our ability to borrow under the facility is subject to certain customary
conditions, including the continuing accuracy of representations and warranties,
the lack of material adverse changes, our continuing compliance with laws and
the lack of defaults under the facility.

Our credit facility contains negative covenants that restrict our ability
to borrow additional funds, encumber assets, pay dividends, sell assets except
in the normal course of business and enter into other significant transactions.

In addition, our credit facility requires us to maintain:

- a ratio of EBITDA to interest expense of not less than 3.0 to 1.0;

- a level of consolidated net tangible assets of not less than $120
million, less the amount of goodwill (not to exceed $55 million)
associated with acquisitions made by us in the period from June 30, 2002
to January 25, 2004, plus 50% of each quarter's consolidated net income
(but not loss);

- a maximum ratio of total debt to EBITDA of not greater than 3.5 to 1.0;
and

- a maximum ratio of total senior debt to EBITDA of not greater than 3.0 to
1.0.

Under our credit facility, the occurrence of specified change of control
events involving our company would constitute an event of default that would
permit the banks to, among other things, accelerate the maturity of the facility
and cause it to become immediately due and payable in full.

As of December 31, 2002, we had $124.3 million outstanding under this
facility and an additional $8.1 million of outstanding letters of credit,
leaving $35.3 million available to be drawn under the facility. We had an
aggregate of approximately $5.8 million of subordinated debt outstanding at
December 31, 2002. The subordinated debt will become due and payable at various
times through September 2007. See Note 6 to our Consolidated and Combined
Financial Statements included in this Annual Report on Form 10-K. Our total debt
represented 25.7% of our total book capitalization at December 31, 2002.

We believe that cash from operations and available borrowings under our
credit facility will be sufficient to meet our liquidity needs for the
foreseeable future. If our plans or assumptions change or are inaccurate, or we
make any acquisitions, we may need to raise additional capital. However, there
is no assurance that we will be able to raise additional funds or be able to
raise such funds on favorable terms.

TAX MATTERS

For the year ended December 31, 2002, we had deferred tax assets, net of
deferred tax liabilities, of approximately $5.2 million for federal income tax
purposes before application of valuation allowances. Our primary deferred tax
assets are net operating loss carry forwards, or NOLs, which total approximately
$76 million. A valuation allowance is currently provided against the majority of
our NOLs. The NOLs expire over a period through 2020. A portion of our NOLs are
currently limited under Section 382 of the Internal Revenue Code due to a change
of control that occurred during 1995. In 2003, approximately $39 million of NOLs
are available for use if sufficient income is generated. However, if a
successive change in control is triggered in 2003 pursuant to Section 382, it is
possible that a significantly lesser amount of NOLs would be available for use
in such year. Such a scenario could have a significant negative impact on our
cash taxes
32

payable, however, it is anticipated that any such change would not trigger a
significant adverse impact on our 2003 tax expense. This is attributable to the
operation of the valuation allowance related to our NOL carryforwards. See Note
10 to our Consolidated and Combined Financial Statements included in this Annual
Report on Form 10-K.

Our 2002 effective tax rate was approximately 22%. This low effective tax
rate was due to the partial utilization of net operating losses which benefited
the consolidated group after the Combination. During 2002, we paid cash taxes of
$9.4 million. We currently estimate our 2003 effective tax rate will be
approximately 29%. Our actual effective tax rates could differ materially from
these estimates, which are subject to a number of uncertainties, including
future taxable income projections, the amount of income attributable to domestic
versus foreign sources, the amount of capital expenditures and any changes in
applicable tax laws and regulations.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No.
142, "Goodwill and Other Intangible Assets" (the "Statements"), effective for
fiscal years beginning after December 15, 2001. Under the new rules, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives.

We began applying the new rules on accounting for goodwill and other
intangible assets in the first quarter of 2002. Application of the
nonamortization provisions of the Statements resulted in an increase in net
income of approximately $8.0 million ($.16 per diluted share) for year 2002. We
have performed the required impairment tests of goodwill and indefinite lived
intangible assets as of December 31, 2002 and there was no impairment of assets
indicated.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This Statement is effective for
fiscal years beginning after June 15, 2002, and we expect to adopt the Statement
effective January 1, 2003. We expect that this Statement will have an immaterial
effect on our consolidated financial statements.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We were
required to adopt this Statement effective January 1, 2002, and it did not have
an impact on our consolidated financial statements.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145
which, among other things, rescinded SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt." We are required to adopt this statement in 2003,
and we expect it will not have a material impact on our financial statements.

We have adopted the disclosure requirements of SFAS No. 148, "Accounting
for Stock Based Compensation -- Transition and Disclosure," issued in December
2002, effective with our December 31, 2002 consolidated and combined financial
statements and related footnotes.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. We have long-term debt and revolving lines of credit
subject to the risk of loss associated with movements in interest rates.

As of December 31, 2002, we had floating rate obligations totaling
approximately $124.3 million for amounts borrowed under our revolving credit
facility. These floating-rate obligations expose us to the risk of increased
interest expense in the event of increases in short-term interest rates. If the
floating interest rate were to increase by 1% from December 31, 2002 levels, our
consolidated interest expense would increase by a total of approximately $1.2
million annually.

Foreign Currency Exchange Rate Risk. Our operations are conducted in
various countries around the world in a number of different currencies. As such,
our earnings are subject to movements in foreign currency
33

exchange rates when transactions are denominated in currencies other than the
U.S. dollar, which is our functional currency. In order to mitigate the effects
of exchange rate risks, we generally pay a portion of our expenses in local
currencies and a substantial portion of our contracts provide for collections
from customers in U.S. dollars. As of December 31, 2002, we had Canadian
dollar-denominated debt totaling approximately $3.2 million. As of December 31,
2002, we had foreign currency forward purchase option contracts totaling $5.0
million at rates not significantly different from the actual rates at December
31, 2002. We have incurred no material gains or losses from foreign currency
hedging activities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our combined, pro forma combined and consolidated financial statements and
supplementary data of the Company appear on pages 41 through 74 of this Annual
Report on Form 10-K and are incorporated by reference into this Item 8. Selected
quarterly financial data is set forth in Note 16 to our Consolidated and
Combined Financial Statements, which is incorporated herein by reference.

34

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

There were no changes in or disagreements on any matters of accounting
principles or financial statement disclosure between us and our independent
auditors during our two most recent fiscal years or any subsequent interim
period.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 hereby is incorporated by reference to
such information as set forth in the Company's Definitive Proxy Statement for
the 2003 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 hereby is incorporated by reference to
such information as set forth in the Company's Definitive Proxy Statement for
the 2003 Annual Meeting of Stockholders.

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

The information required by Item 12 hereby is incorporated by reference to
such information as set forth in the Company's Definitive Proxy Statement for
the 2003 Annual Meeting of Stockholders and from "Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters -- Equity
Compensation Plans" of this Annual Report on Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 hereby is incorporated by reference to
such information as set forth in the Company's Definitive Proxy Statement for
the 2003 Annual Meeting of Stockholders.

ITEM 14. CONTROLS AND PROCEDURES

On March 3, 2003, our Chief Executive Officer and Chief Financial Officer
performed an evaluation of our disclosure controls and procedures, which have
been designed to permit us to effectively identify and timely disclose important
information. They concluded that the controls and procedures were effective. We
have made no significant changes in our internal controls or in other factors
that could significantly affect our internal controls since March 3, 2003.

Pursuant to section 906 of The Sarbanes-Oxley Act of 2002, our Chief
Executive Officer and Chief Financial Officer have provided certain
certifications to the Securities and Exchange Commission. These certifications
accompanied this report when filed with the Commission, but are not set forth
herein.

PART IV

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

(a) Index to Financial Statements, Financial Statement Schedules and
Exhibits

(1) Financial Statements: Reference is made to the index set forth on
page 38 of this Annual Report on Form 10-K.

(2) Financial Statement Schedules: No schedules have been included
herein because the information required to be submitted has been included
in the Pro Forma Consolidated and Combined financial statements and
Consolidated and Combined Financial Statements or the Notes thereto, or the
required information is inapplicable.

35

(3) Index of Exhibits: See Index of Exhibits, below, for a list of
those exhibits filed herewith, which index also includes and identifies
management contracts or compensatory plans or arrangements required to be
filed as exhibits to this Annual Report on Form 10-K by Item 601(10)(iii)
of Regulation S-K.

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the period covered by this report.

(c) Index of Exhibits

- ---------------

* Filed herewith

** Management contracts or compensatory plans or arrangements

37

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.

OIL STATES INTERNATIONAL, INC.

By /s/ DOUGLAS E. SWANSON
------------------------------------
Douglas E. Swanson
President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities indicated on March 13, 2003.

38

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Douglas E. Swanson, certify that:

1. I have reviewed this annual report on Form 10-K of Oil States
International, Inc. ("Registrant");

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

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

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

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

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

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

5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's Board of Directors (or persons performing
the equivalent functions):

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

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

6. The Registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to the significant deficiencies and
material weaknesses.

/s/ DOUGLAS E. SWANSON
--------------------------------------
Douglas E. Swanson
President and Chief Executive Officer

Date: March 13, 2003

39

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Cindy Taylor, certify that:

1. I have reviewed this annual report on Form 10-K of Oil States
International, Inc. ("Registrant");

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

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

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

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

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

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

5. The Registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's Board of Directors (or persons performing
the equivalent functions):

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

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

6. The Registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to the significant deficiencies and
material weaknesses.

/s/ CINDY B. TAYLOR
--------------------------------------
Cindy B. Taylor
Senior Vice President and Chief
Financial Officer

Date: March 13, 2003

40

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO COMBINED, PRO FORMA COMBINED AND
CONSOLIDATED FINANCIAL STATEMENTS

Unaudited Pro Forma Consolidated and Combined Financial
Statements................................................ 42
Unaudited Pro Forma Consolidated and Combined Statement of
Operations for the Year Ended December 31, 2001........ 43
Unaudited Pro Forma Combined Statement of Operations for
the Year Ended December 31, 2000....................... 44
Notes to Unaudited Pro Forma Consolidated and Combined
Financial Statements................................... 45
Consolidated and Combined Financial Statements
Reports of Independent Auditors
Ernst and Young LLP....................................... 47
PricewaterhouseCoopers LLP................................ 48
Consolidated and Combined Statements of Income for the Years
Ended December 31, 2002, 2001, and 2000................... 49
Consolidated Balance Sheets at December 31, 2002 and 2001... 50
Consolidated and Combined Statements of Stockholders' Equity
and Comprehensive Income (Loss) for the Years Ended
December 31, 2002, 2001 and 2000.......................... 51
Consolidated and Combined Statements of Cash Flow for the
Years Ended December 31, 2002, 2001, and 2000............. 52
Notes to the Consolidated and Combined Financial
Statements................................................ 53

41

UNAUDITED PRO FORMA CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

The consolidated financial statements of Oil States International, Inc.
reflect the Company's financial position, results of operations and changes in
stockholders' equity for periods subsequent to February 14, 2001, the date of
the Company's initial public offering and the combination of Oil States
International, Inc. (Oil States), HWC Energy Services, Inc. (HWC) and PTI Group
Inc. (PTI) (collectively the Controlled Group), among other things.

As more fully described below, and in footnotes that follow, the combined
financial statements reflect the financial position, results of operations and
changes in stockholders' equity of the predecessor entities that now comprise
Oil States International, Inc. based on reorganization accounting. The pro forma
financial information that follows reflect the Company's historical consolidated
or combined statements of operations, depending upon the period involved, and
give effect to the pro forma transactions and adjustments more fully described
below.

The following tables set forth unaudited pro forma consolidated and
combined financial information for Oil States giving effect to:

- the combination of Oil States, HWC and PTI as entities under the common
control of SCF-III L.P. (SCF III), based upon reorganization accounting,
which yields results similar to pooling of interest accounting, effective
from the dates each of these entities became controlled by SCF III;

- the conversion of the common stock held by the minority interests of each
entity in the Controlled Group into shares of the Company's common stock,
based on the purchase method of accounting;

- the conversion of all of the outstanding common stock of Sooner Inc.
(Sooner) into shares of the Company's common stock, based on the purchase
method of accounting; and

- the exchange of 4,275,555 shares of common stock for $36.0 million of
debt of Sooner and Oil States; and

- the Company's sale of 10,000,000 shares of common stock (the Offering)
and the application of the net proceeds totaling $84.1 million. With the
proceeds received in the Offering, the Company repaid $43.7 million of
outstanding subordinated debt of the Controlled Group and Sooner,
redeemed $21.8 million of preferred stock of Oil States, paid accrued
interest on subordinated debt and accrued dividends on preferred stock
aggregating $7.1 million, and repurchased common stock from non-
accredited shareholders and shareholders holding pre-emptive stock
purchase rights for $1.6 million. The balance of the proceeds was used to
reduce amounts outstanding under bank lines of credit.

The unaudited pro forma consolidated and combined statements of operations for
the years ended December 31, 2001 and 2000 were prepared based upon the
historical consolidated and combined financial statements of the Controlled
Group, adjusted to conform accounting policies, and give effect to:

- the Company's acquisition of minority interests of the Controlled Group;

- the Company's acquisition of Sooner;

- the Company's exchange of shares of common stock for debt of Sooner and
Oil States; and

- the Company's sale of shares in the Offering,

as if these transactions had occurred on January 1, 2000 and 2001, respectively.

The unaudited pro forma combined financial statements do not purport to be
indicative of the results that would have been obtained had the transactions
described above been completed on the indicated dates or that may be obtained in
the future. The unaudited pro forma combined financial statements should be read
in conjunction with the historical consolidated and combined financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.

42

OIL STATES INTERNATIONAL, INC.

PRO FORMA CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001

43

OIL STATES INTERNATIONAL, INC.

PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000

44

OIL STATES INTERNATIONAL, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

The purchase method of accounting has been used to reflect the acquisition
of the minority interests of each company in the Controlled Group concurrent
with the closing of the Offering. The purchase price is based on the fair value
of the shares owned by the minority interests, valued at the initial public
offering price of $9.00 per share. Under this accounting method, the excess of
the purchase price over the fair value of the assets and liabilities allocable
to the minority interests acquired has been reflected as goodwill. Where book
value of minority interests exceeded the purchase price, such excess reduced
property, plant and equipment. For purposes of the pro forma combined financial
statements, the goodwill recorded in connection with this transaction was
initially being amortized over 20 years using the straight-line method based on
management's evaluation of the nature and duration of customer relationships and
considering competitive and technological developments in the industry. Note,
however, that accounting for goodwill changed under new accounting
pronouncements (See Note 3 to Consolidated and Combined Financial Statements).
The unaudited pro forma statements of operations for the years ended December
31, 2001 and 2000 have been adjusted for the effects of purchase accounting, as
described below.

The purchase method of accounting was also used to reflect the acquisition
of the outstanding common stock of Sooner concurrent with the closing of the
Offering. The purchase price is based on the fair value of the shares of Sooner,
valued at the initial public offering price of $9.00 per share. The excess of
the purchase price over the fair value of the assets and liabilities of Sooner
has been reflected as goodwill. For purposes of the pro forma combined financial
statements, the goodwill recorded in connection with this transaction was
initially being amortized over 15 years using the straight-line method based on
management's evaluation of the nature and duration of customer relationships and
considering competitive and technological developments in the industry. Note,
however, that accounting for goodwill changed under new accounting
pronouncements (See Note 3 to Consolidated and Combined Financial Statements).
The unaudited pro forma statements of operations for the years ended December
31, 2001 and 2000 include the historical financial statements of Sooner,
converted to a calendar year end and adjusted for the effects of purchase
accounting, as presented below.

NOTE 1. COMBINING ADJUSTMENTS

Minority interest in (income) loss and related tax effect of the Controlled
Group are presented below (in thousands):

NOTE 2. ACQUISITION OF SOONER

Certain reclassifications have been made to conform the presentation of
Sooner's financial statements to the Controlled Group.

45

OIL STATES INTERNATIONAL, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED AND
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

To reflect the acquisition of all outstanding common shares of Sooner in
exchange for 7,597,152 shares of Oil States common stock valued at the estimated
offering price per share of $9.00 (in millions):

Purchase price.............................................. $ 69.5(1)
Less: fair value of net assets acquired..................... 29.7
-------
Goodwill.................................................... $39.8
-----
Amortization for the year ended December 31, 2000........... $2.65
=====
Amortization for the period from January 1, 2001 to February
14, 2001.................................................. $ .33
=====

- ---------------

(1) The purchase price for Sooner includes the estimated fair value of Sooner
stock options ($1.1 million) converted into Oil States stock options.

NOTE 3. ACQUISITION OF MINORITY INTERESTS

To reflect the acquisition of the minority interests of each company in the
Controlled Group in exchange for shares of Oil States common stock and
elimination of the historical amounts reflected for the combined group (in
millions, except share and per share information):

NOTE 4. OFFERING

(A) To adjust interest expense for debt repaid with Offering proceeds and
as a result of the exchange of shares for subordinated debt.

(B) To adjust for costs associated with the new corporate office, including
executives hired in connection with the Offering, which costs are not fully
reflected in the historical financial statements. These costs will have a
continuing impact on the Company's operations.

(C) To eliminate preferred stock dividends due to the redemption of the
preferred stock.

(D) To adjust income tax expense for the reduction of deferred taxes due to
the formation of the combined group.

46

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND STOCKHOLDERS OF OIL STATES INTERNATIONAL, INC.

We have audited the accompanying consolidated balance sheets of Oil States
International, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity and
comprehensive income (loss), and cash flows for the year ended December 31, 2002
and the related consolidated and combined statements of income, stockholders'
equity and comprehensive income (loss) and cash flows for the year ended
December 31, 2001 and the combined statements of income, stockholders' equity
and comprehensive income (loss) and cash flows for the year ended December 31,
2000. We did not audit the financial statements of PTI Group Inc., for any
period prior to January 1, 2001, which represented 36% of total revenue in 2000.
These financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for PTI Group Inc., for the period noted, is based solely on the report of the
other auditors. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Oil States International, Inc. and
subsidiaries at December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for the year ended December 31, 2002, the
consolidated and combined results of their operations and their cash flows for
the year ended December 31, 2001, and the combined results of their operations
and their cash flows for the year ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 3 to the consolidated and combined financial
statements, effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."

ERNST & YOUNG LLP

Houston, Texas
January 31, 2003

47

AUDITORS' REPORT

TO THE SHAREHOLDERS AND DIRECTORS OF PTI GROUP INC.

We have audited the consolidated balance sheets of PTI Group Inc. as at
December 31, 2000 and 1999 and the consolidated statements of earnings,
shareholders' equity and cash flows for the years ended December 31, 2000, 1999
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards in Canada and the United States. Those standards require that we plan
and perform an audit to obtain reasonable assurance 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.

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
2000 and 1999 and the results of its operations and its cash flows for the years
ended December 31, 2000, 1999 and 1998 in accordance with United States
generally accepted accounting principles.

PRICEWATERHOUSECOOPERS LLP
CHARTERED ACCOUNTANTS

Edmonton, Alberta
February 26, 2001

48

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED AND COMBINED STATEMENTS OF INCOME

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

49

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements.
50

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

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

The accompanying notes are an integral part of these financial statements.
51

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these financial statements.
52

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Oil States
International, Inc. (Oil States or the Company) and its consolidated
subsidiaries since February 14, 2001. On February 14, 2001, the Company acquired
the three companies (HWC Energy Services, Inc. -- HWC; PTI Group, Inc. -- PTI
and Sooner Inc. -- Sooner) reported in the Combined and Pro Forma financial
statements presented herein. The combined financial statements include the
activities of Oil States, HWC and PTI, (collectively, the Controlled Group) for
the period prior to February 14, 2001, utilizing reorganization accounting. The
reorganization accounting method, which yields results similar to the pooling of
interests method, has been used in the preparation of the combined financial
statements of the Controlled Group (entities under common control of SCF-III
L.P. (SCF-III), a private equity fund that focuses on investments in the energy
industry). Under this method of accounting, the historical financial statements
of HWC and PTI are combined with Oil States for the year ended December 31, 2000
and for the period until February 14, 2001 when Oil States, HWC and PTI merged
and Oil States acquired Sooner in exchange for its common stock. After February
14, 2001, the consolidated financial statements of Oil States include the
results of all its subsidiaries including HWC, PTI and Sooner. The combined
financial statements have been adjusted to reflect minority interests in the
Controlled Group. All significant intercompany accounts and transactions between
the consolidated entities have been eliminated in the accompanying consolidated,
combined and pro forma financial statements.

OIL STATES INDUSTRIES, INC.

Oil States Industries, Inc. (OSI), a subsidiary of Oil States, is a leading
designer and manufacturer of a diverse range of products for offshore platforms,
subsea pipelines, and defense and general industrial applications. Major product
lines include flexible bearings, advanced connectors, mooring and lifting
systems, winches, services for installing and removing offshore platforms,
downhole production equipment, and custom molded products. Sales are made
primarily to major oil companies, large and small independent oil and gas
companies, drilling contractors, and well service and workover operators on a
worldwide basis. OSI has facilities in Arlington, Houston and Lampasas, Texas;
Houma, Louisiana; Tulsa, Oklahoma; Scotland; Brazil; England and Singapore.

PTI GROUP, INC.

PTI is located in Alberta, Canada and is a supplier of integrated housing,
food, site management and logistics support services to remote sites utilized by
natural resources and other industries primarily in Canada and the United
States.

HWC ENERGY SERVICES, INC.

HWC provides worldwide well control services, drilling services and rental
equipment to the oil and gas industry. HWC operates primarily in Texas,
Louisiana, Ohio, Oklahoma, New Mexico and Wyoming, along with foreign operations
conducted in Venezuela, the Middle East, and Africa. Its hydraulic well control
operations provide, globally, hydraulic workover (snubbing) units for emergency
well control situations and, in selected markets, various hydraulic well control
solutions involving well drilling and workover and completion activities. In
West Texas and Ohio, HWC operates, through its subsidiary Capstar Drilling,
L.P., shallow well drilling rigs with automated pipe handling capabilities.
Specialty Rental Tools and Supply, L.P., a subsidiary of HWC, provides rental
equipment for drilling and workover operations in Texas, Louisiana, Mississippi,
New Mexico, Oklahoma and Wyoming.

53

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

SOONER, INC.

Sooner is a distributor of oilfield tubular products with operations
located primarily in the United States. The majority of sales are to large fully
integrated and independent oil companies headquartered in the U.S.

2. INITIAL PUBLIC OFFERING, MERGER TRANSACTIONS AND REFINANCING

On February 9, 2001, the Company's common stock began trading on the New
York Stock Exchange under the symbol "OIS" pursuant to completion of its initial
public offering (the Offering). On February 14, 2001, the Company closed the
business combination and the Offering thereby acquiring the minority interests
in PTI and HWC and 100% of the Sooner operations. The Company recorded
additional goodwill of $61.9 million as a result of the acquisition of these
minority interests.

Concurrently with the Offering, the Company acquired Sooner for $69.5
million. The Company exchanged 7,597,152 shares of its common stock for all the
outstanding common shares of Sooner. The Company accounted for the acquisition
using the purchase method of accounting and recorded approximately $40 million
in goodwill.

Concurrently with the closing of the Offering, the Company issued 4,275,555
shares of common stock to SCF-III and SCF-IV L.P. (SCF-IV) in exchange for
approximately $36.0 million of indebtedness of Oil States and Sooner which was
held by SCF-III and SCF-IV (the SCF Exchange).

With the proceeds received in the Offering, the Company repaid $43.7
million of outstanding subordinated debt of the Controlled Group and Sooner,
redeemed $21.8 million of preferred stock of Oil States, paid accrued interest
on subordinated debt and accrued dividends on preferred stock aggregating $7.1
million, and repurchased common stock from non-accredited shareholders and
shareholders holding pre-emptive stock purchase rights for $1.6 million. The
balance of the proceeds was used to reduce amounts outstanding under bank lines
of credit.

On February 14, 2001, the Company entered into a senior secured revolving
credit facility. This credit facility replaced existing bank credit facilities
(See Note 6).

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash and cash equivalents,
investments, receivables, payables, and debt instruments. The Company believes
that the carrying values of these instruments on the accompanying consolidated
balance sheets approximate their fair values.

INVENTORIES

Inventories consist of tubular and other oilfield products, manufactured
equipment, and spare parts for manufactured equipment. Inventories include raw
materials, work in process, finished goods, labor, and manufacturing overhead.
The cost of tubular goods inventories is determined using the first-in,
first-out (FIFO) method and the cost for the remaining inventories is determined
on an average cost or specific-identification method.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are stated at cost, or at estimated fair
market value at acquisition date if acquired in a business combination, and
depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are capitalized and amortized
over the lesser of the life of the lease or the estimated useful life of the
asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of income.

GOODWILL

Goodwill represents the excess of the purchase price for acquired
businesses over the allocated value of the related net assets. Prior to 2002,
goodwill was amortized on a straight-line basis over a period of 15 to 40 years
based on management's evaluation of the nature and duration of customer
relationships and considering competitive and technological developments in the
industry. Goodwill is stated net of accumulated amortization of $17.4 million
and $18.2 million at December 31, 2002 and 2001, respectively. The amount of
accumulated amortization of goodwill declined in 2002 compared to 2001 because
of changes in foreign currency exchange rates. In 2001, the Financial Accounting
Standards Board issued a new standard that affected goodwill amortization (See
"Recent Accounting Pronouncements" below).

IMPAIRMENT OF LONG-LIVED ASSETS

In compliance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the recoverability of the carrying values of
property, plant and equipment is assessed at a minimum annually, or whenever, in
management's judgment, events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable based on estimated future
cash flows. If this assessment indicates that the carrying values will not be
recoverable, as determined based on undiscounted cash flows over the remaining
useful lives, an impairment loss is recognized. The impairment loss equals the
excess of the carrying value over the fair value of the asset. The fair value of
the asset is based on prices of similar assets, if available, or discounted cash
flows. Based on the Company's review, the carrying value of its assets are
recoverable and no impairment losses have been recorded for the periods
presented.

In August of 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
Company was required to adopt this Statement effective January 1, 2002 and it
did not have an impact.

FOREIGN CURRENCY AND OTHER COMPREHENSIVE INCOME

Gains and losses resulting from balance sheet translation of foreign
operations where a foreign currency is the functional currency are included as a
separate component of accumulated other comprehensive income within
stockholders' equity. Gains and losses resulting from balance sheet translation
of foreign operations where the U.S. dollar is the functional currency are
included in the consolidated statements of income as incurred.

REVENUE AND COST RECOGNITION

Revenue from the sale of products is recognized upon shipment to the
customer or when all significant risks of ownership have passed to the customer.
For significant fabrication projects built to customer specifications, revenues
are recognized under the percentage-of-completion method, measured by the
55

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

percentage of costs incurred to date to estimated total costs for each contract
(cost-to-cost method). Billings on such contracts in excess of costs incurred
and estimated profits are classified as deferred revenue. Management believes
this method is the most appropriate measure of progress on large fabrication
contracts. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. In rental equipment and
services, revenues are recognized based on a periodic (usually daily) rental
rate or when the services are rendered. Proceeds from customers for the cost of
oilfield rental equipment that is damaged or lost downhole are reflected as
revenues. For drilling contracts based on footage drilled, we recognize revenues
as footage is drilled.

Cost of goods sold includes all direct material and labor costs and those
costs related to contract performance, such as indirect labor, supplies, tools,
and repairs. Selling, general, and administrative costs are charged to expense
as incurred.

INCOME TAXES

The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred income taxes are recorded based upon the differences between the
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 underlying
assets or liabilities are recovered or settled.

When the Company's earnings from foreign subsidiaries are considered to be
indefinitely reinvested, no provision for U.S. income taxes is made for these
earnings. If any of the subsidiaries have a distribution of earnings in the form
of dividends or otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable to the various foreign countries.

In accordance with SFAS No. 109, the Company records a valuation reserve in
each reporting period when management believes that it is more likely than not
that any deferred tax asset created will not be realized. Management will
continue to evaluate the appropriateness of the reserve in the future based upon
the operating results of the Company.

RECEIVABLES AND CONCENTRATION OF CREDIT RISK

Based on the nature of its customer base, the Company does not believe that
it has any significant concentrations of credit risk other than its
concentration in the oil and gas industry. The Company evaluates the
credit-worthiness of its major new and existing customers' financial condition
and, generally, the Company does not require significant collateral from its
domestic customers.

ALLOWANCES FOR DOUBTFUL ACCOUNTS

The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make required
payments. If a trade receivable is deemed to be uncollectible, such receivable
is charged-off against the allowance for doubtful accounts. The Company
considers the following factors when determining if collection of revenue is
reasonably assured: customer credit-worthiness, past transaction history with
the customer, current economic industry trends and changes in customer payment
terms. If the Company has no previous experience with the customer, the Company
typically obtains reports from various credit organizations to ensure that the
customer has a history of paying its creditors. The Company may also request
financial information, including financial statements or other documents to
ensure that the customer has the means of making payment. If these factors do
not indicate collection is reasonably assured, the Company would require a
prepayment or other arrangement to support revenue recognition and recording of
a trade receivable. If the financial condition of the Company's customers were
to deteriorate, adversely affecting their ability to make payments, additional
allowances would be required.

56

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

EARNINGS PER SHARE

The Company's basic income (loss) per share (EPS) amounts have been
computed based on the average number of common shares outstanding, including
824,546 and 3,601,329 shares of common stock as of December 31, 2002 and 2001,
respectively, issuable upon exercise of exchangeable shares of one of the
Company's Canadian subsidiaries. These exchangeable shares, which were issued to
certain former shareholders of PTI in the Combination, are intended to have
characteristics essentially equivalent to the Company's common stock prior to
the exchange. We have treated the shares of common stock issuable upon exchange
of the exchangeable shares as outstanding. Diluted EPS amounts include the
effect of the Company's outstanding stock options under the treasury stock
method and the effect of convertible preferred stock in periods when such
preferred shares were outstanding. All shares awarded under the Company's Equity
Participation Plan are included in the Company's fully diluted shares.

STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation plans under the
principles prescribed by the Accounting Principles Board's Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees." Stock options awarded
under the Equity Participation Plan normally do not result in recognition of
compensation expense. However, 100,000 shares of restricted stock awarded under
the Equity Participation Plan in February 2001 are considered to be compensatory
in nature. Accordingly, the Company recognized $0.3 million of non-cash general
and administrative expenses in both 2002 and 2001. The Company accounts for
assets held in a rabbi trust for certain participants under the Company's
deferred compensation plan in accordance with EITF 97-14. See Note 14.

RECLASSIFICATIONS

Certain amounts in prior years' financial statements have been reclassified
to conform with the current year presentation.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires the use
of estimates and assumptions by management in determining the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Examples of a few such
estimates include the costs associated with the disposal of discontinued
operations, including potential future adjustments as a result of contractual
agreements, revenue and income recognized on the percentage-of-completion
method, and the valuation allowance recorded on net deferred tax assets. Actual
results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142). In connection with the adoption of SFAS
No. 142, the Company ceased amortizing goodwill. Under SFAS No. 142, goodwill is
no longer amortized but is tested for impairment using a fair value approach, at
the "reporting unit" level. A reporting unit is the operating segment, or a
business one level below that operating segment (the "component" level) if
discrete financial information is prepared and regularly reviewed by management
at the component level. We recognize an impairment charge for any amount by
which the carrying amount of a reporting unit's goodwill exceeds its fair value.
We use comparative market multiples to establish fair values.

57

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

We amortize the cost of other intangibles over their estimated useful lives
unless such lives are deemed indefinite. Amortizable intangible assets are
tested for impairment based on undiscounted cash flows and, if impaired, written
down to fair value based on either discounted cash flows or appraised values.
Intangible assets with indefinite lives are tested for impairment and written
down to fair value as required. No provision for goodwill or other intangibles
impairment was required based on the evaluations performed.

Changes in the carrying amount of goodwill for the year ended December 31,
2002, are as follows (in thousands):

The following tables present what reported income available to common
stockholders before extraordinary items and net income before extraordinary
items per share would have been in all periods presented exclusive of
amortization expense recognized in those periods related to goodwill (in
thousands, except per share amounts):

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This Statement is effective for
fiscal years beginning after June 15, 2002, and the Company expects to adopt the
Statement effective January 1, 2003. The Company expects that this Statement
will have an immaterial effect on the Company's consolidated financial
statements.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
Company was required to adopt this Statement effective January 1, 2002, and it
did not have an impact on its consolidated financial statements.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145
which, among other things, rescinded SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt". The Company is required to adopt this statement in
2003, and the Company expects that it will not have a material impact on its
financial statements.

The Company has adopted the disclosure requirements of SFAS No. 148,
"Accounting for Stock Based Compensation -- Transition and Disclosure," issued
in December 2002, effective with its December 31, 2002 consolidated and combined
financial statements and related footnotes.

4. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

Additional information regarding selected balance sheet accounts at
December 31, 2002 and 2001, is presented below (in thousands):

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

5. ACQUISITIONS

During 2002, the Company acquired the following six businesses for total
consideration of approximately $72.0 million, which was financed primarily with
borrowings under the Company's credit facility:

- Effective March 1, 2002, the Company acquired Southeastern Rentals LLC,
based in Mississippi, and effective August 1, 2002, the Company acquired
Edge Wireline Rentals, Inc. and certain affiliated companies, located in
Louisiana, and J.V. Oilfield Rentals & Supply, Inc. and certain
affiliated companies, located in Louisiana, all of which are suppliers of
rental tools to the oil and gas service industry. These businesses were
merged into the Company's existing rental tool business included in the
well site services segment.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

- Effective July 16, 2002, the Company acquired Barlow Hunt, Inc., based in
Oklahoma, an elastomer molding company which became part of the Company's
existing elastomer business included in the offshore products segment.

- Effective August 14, 2002, the Company acquired certain assets and
liabilities of Big Inch Marine Services, Inc., a Texas-based subsidiary
of Stolt Offshore, Inc., which provides subsea pipeline equipment and
repair services similar to those provided by the Company's offshore
products segment.

- Effective September 26, 2002, Applied Hydraulic Systems, Inc. (AHSI), was
acquired by the Company. AHSI is a Louisiana based offshore crane
manufacturer and repair service provider, which became part of the
Company's offshore products segment.

Goodwill recognized in the above acquisitions amounted to $40.1 million, of
which $9.1 million is expected to be deductible for tax purposes. See Note 3 for
details of goodwill by segment. Additionally, the Company allocated $3.7 million
of total consideration paid to certain non-compete agreements which will be
amortized over the life of the agreements.

An allocation of the purchase price paid in the acquisitions detailed above
has been assigned to the assets and liabilities based upon the estimated fair
value of those assets and liabilities as of the acquisition dates. Such
allocation is based on the Company's internal evaluation of such assets and
supplemented by independent appraisals. The balances included in the
Consolidated Balance Sheet related to the current year acquisitions are based
upon preliminary information and are subject to change when additional
information concerning final asset and liability valuations is obtained.
However, material changes in the preliminary allocations are not anticipated.

On February 14, 2001, the Company acquired 100% of the issued and
outstanding shares of Sooner for $69.5 million of the Company's common stock
(See Note 2).

6. LONG-TERM DEBT

As of December 31, 2002 and 2001, long-term debt consisted of the following
(in thousands):

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Scheduled maturities of combined long-term debt as of December 31, 2002,
are as follows (in thousands):

The Company's capital leases consist primarily of plant facilities and
equipment. Capitalized lease assets value and related accumulated depreciation
totaled $4.2 million and $1.1 million at December 31, 2002, respectively.
Capitalized lease assets value and related accumulated depreciation totaled $1.7
million and $0.6 million at December 31, 2001, respectively.

CURRENT DEBT INSTRUMENTS

The Company currently has a $167.7 million senior secured revolving credit
facility with a group of banks. Up to $45.0 million of the credit facility is
available in the form of loans denominated in Canadian dollars and may be made
to the Company's principal Canadian operating subsidiaries. The facility matures
on January 25, 2005, unless extended for up to one additional year period with
the consent of the lenders. Amounts borrowed under this facility bear interest,
at the Company's election, at either:

- a variable rate equal to LIBOR (or, in the case of Canadian dollar
denominated loans, the Bankers' Acceptance discount rate) plus a margin
ranging from 1.75% to 3.0%; or

- an alternate base rate equal to the higher of the bank's prime rate and
the federal funds effective rate plus 0.5% (or, in the case of Canadian
dollar denominated loans, the Canadian Prime Rate) plus a margin ranging
from 0.75% to 2.0%, depending upon the ratio of total debt to EBITDA (as
defined in the credit facility).

Commitment fees of 0.5% per year are paid on the undrawn portion of the
facility.

Subject to exceptions, commitments under the Company's credit facility will
be permanently reduced, and loans prepaid, by an amount equal to 100% of the net
cash proceeds of all non-ordinary course asset sales and the issuance of
additional debt and by 50% of the issuance of equity securities. Mandatory
commitment reductions will be allocated pro rata based on amounts outstanding
under the U.S. dollar denominated facility and the Canadian dollar denominated
facility. In addition, voluntary reductions in commitments will be permitted.

62

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The credit facility is guaranteed by all of the Company's active domestic
subsidiaries and, in some cases, the Company's Canadian and other foreign
subsidiaries. The credit facility is secured by a first priority lien on all the
Company's inventory, accounts receivable and other material tangible and
intangible assets, as well as those of the Company's active subsidiaries.
However, no more than 65% of the voting stock of any foreign subsidiary is
required to be pledged if the pledge of any greater percentage would result in
adverse tax consequences.

The credit facility contains negative covenants that restrict the Company's
ability to borrow additional funds, pay dividends, sell assets except in the
normal course of business and enter into other significant transactions.

Under the Company's credit facility, the occurrence of specified change of
control events involving our company would constitute an event of default that
would permit the banks to, among other things, accelerate the maturity of the
facility and cause it to become immediately due and payable in full.

As of December 31, 2002, we had $124.3 million outstanding under this
facility and an additional $8.1 million of outstanding letters of credit leaving
$35.3 million available to be drawn under the facility. The Company's weighted
average interest rate on the Company's outstanding borrowings under this
facility at December 31, 2002 was 3.7%.

In conjunction with executing the senior secured revolving credit facility
on January 25, 2001, OSI recognized an extraordinary charge, net of tax benefit,
of $0.78 million. This extraordinary charge was due to the write-off of deferred
financing costs related to OSI's credit facilities and the payment of prepayment
penalties of $0.25 million.

On June 12, 2002, the Company renewed its overdraft credit facility
providing for borrowings totaling L5.0 million for UK operations. Interest is
payable quarterly at a margin of 1.5% per annum over the bank's variable base
rate. All borrowings under this facility are payable on demand.

7. POSTRETIREMENT HEALTHCARE AND OTHER INSURANCE BENEFITS

The Company provides healthcare and other insurance benefits for
approximately 600 eligible retired employees and dependent spouses. This plan is
no longer available to current employees. The healthcare plans are contributory
and contain other cost-sharing features such as deductibles, lifetime maximums,
and co-payment requirements.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The healthcare plans are not funded, and the Company's policy is to pay
these benefits as they are incurred.

The accumulated benefit obligation was determined under an actuarial
assumption using a healthcare cost trend rate of 9.0% for medical and 12.0% for
prescription drugs in 2003, gradually declining to approximately 5% in the year
2009 and thereafter over the projected payout period of the benefits. The
accumulated benefit obligations were determined using an assumed discount rate
of 6.75% and 7.25% at December 31, 2002 and 2001, respectively. Under the plan's
provisions, the Company's prescription costs are capped at annual benefit
limits.

A one percentage-point increase or decrease in the assumed healthcare cost
trend rates would be immaterial to the accumulated postretirement benefit
obligation and net periodic benefit cost at December 31, 2002.

8. RETIREMENT PLANS

Prior to January 2002, the Company sponsored a number of defined
contribution plans. Effective in January 2002, the Company merged its domestic
defined contribution plans into a single plan sponsored by the Company.
Participation in these plans is available to substantially all employees.

The Company recognized expense of $2.5 million, $1.7 million and $1.7
million related to its various defined contribution plans during the years ended
December 31, 2002, 2001 and 2000, respectively.

9. PREFERRED STOCK

Cash dividends paid on preferred stock in 2001 related to preferred stock
that was either repaid in cash or converted to common stock in connection with
the Offering completed in February 2001 (See Note 2).

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

10. INCOME TAXES

Consolidated pre-tax income (loss) for the years ended December 31, 2002,
2001 and 2000 consisted of the following (in thousands):

The components of the income tax provision (benefit) before extraordinary
items for the years ended December 31, 2002, 2001 and 2000 consisted of the
following (in thousands):

The provision for taxes before extraordinary items differs from an amount
computed at statutory rates as follows for the years ended December 31, 2002,
2001 and 2000 (in thousands):

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The significant items giving rise to the deferred tax assets and
liabilities as of December 31, 2002 and 2001 are as follows (in thousands):

Reclassifications of the Company's deferred tax balance based on net
current items and net non-current items as of December 31, 2002 is as follows
(in thousands):

For US federal income tax purposes, the Company has net operating loss
carryforwards of approximately $76.0 million for regular income taxes that will
expire in the years 2005 through 2020. A portion of the Company's net operating
loss carryforwards are subject to limitations under Section 382 of the Internal
Revenue Code of 1986, as amended. Based on these limitations, the years the
carryforwards expire, and the uncertainty in achieving levels of taxable income
required for their utilization, the Company has provided a valuation allowance
on a portion of these carryforwards. The Company has federal alternative minimum
tax net operating loss carryforwards of $58.0 million, which will expire in the
years 2005 through 2020.

Appropriate US and foreign income taxes have been provided for earnings of
foreign subsidiary companies that are expected to be remitted in the near
future. The cumulative amount of undistributed earnings of foreign subsidiaries
that the Company intends to permanently reinvest and upon which no deferred US
income taxes have been provided is $69.6 million at December 31, 2002. Upon
distribution of these earnings in the form of dividends or otherwise, the
Company may be subject to US income taxes and foreign
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

withholding taxes. It is not practical, however, to estimate the amount of taxes
that may be payable on the eventual remittance of these earnings after
consideration of available foreign tax credits. Presently, foreign tax credits
are available to offset, in part, any additional US tax that would be due upon
repatriation of such earnings.

During the year ended December 31, 2002, the Company recognized a tax
benefit triggered by employee exercises of stock options totaling $0.4 million.
Such benefit was credited to additional paid-in capital.

A portion of the deferred tax assets associated with property, plant and
equipment and net operating loss carryforwards relates to the Company's Canadian
subsidiary's Chilean operation. Because these deferred tax assets can only be
realized against income earned in Chile, a valuation allowance has been
provided. The operating loss carryforwards of approximately $2.9 million are
available to reduce future years' taxable income, with no expiration date.

11. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the years ended December 31, 2002, 2001 and 2000 for
interest and income taxes was as follows (in thousands):

Components of cash used for acquisitions as reflected in the consolidated
statements of cash flows for the years ended December 31, 2002, 2001 and 2000
are summarized as follows (in thousands):

In connection with acquisitions made in 2002, the Company had non-cash
transactions consisting of the issuance of $2.0 million of notes payable and the
assumption of capital leases totaling $3.3 million.

12. COMMITMENTS AND CONTINGENCIES

The Company leases a portion of its equipment, office space, computer
equipment, automobiles and trucks under leases which expire at various dates.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Minimum future operating lease obligations in effect at December 31, 2002,
are as follows (in thousands):

Rental expense under operating leases was $4.3 million, $3.9 million and
$3.0 million for the years ended December 31, 2002, 2001 and 2000, respectively.

As of December 31, 2002, the Company had entered into forward purchase
option contracts through February 26, 2003 with a bank totaling $5.0 million for
the purchase of foreign currency as a hedge to expected future billings. The
contract purchase rates were not significantly different from the December 31,
2002 currency exchange rates. We have incurred no material gains or losses from
foreign currency hedging activities.

The Company is a party to various pending or threatened claims, lawsuits
and administrative proceedings seeking damages or other remedies concerning its
commercial operations, products, employees and other matters, including
occasional claims by individuals alleging exposure to hazardous materials as a
result of its products or operations. Some of these claims relate to matters
occurring prior to its acquisition of businesses, and some relate to businesses
it has sold. In certain cases, the Company is entitled to indemnification from
the sellers of businesses and in other cases, it has indemnified the buyers of
businesses from it. Although the Company can give no assurance about the outcome
of pending legal and administrative proceedings and the effect such outcomes may
have on it, management believes that any ultimate liability resulting from the
outcome of such proceedings, to the extent not otherwise provided for or covered
by insurance, will not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.

13. RELATED-PARTY TRANSACTIONS

The Company incurred legal fees totaling $0.24 million in 2001 for services
rendered by a law firm in connection with a possible acquisition of a company. A
member of the Company's Board of Directors is a partner with that law firm. No
transaction resulted from the acquisition effort.

The company currently rents land and buildings from an officer of a
subsidiary of the Company and pays a monthly rent of $5,100. Such officer was
the previous owner of a business acquired by Oil States.

L. E. Simmons & Associates Incorporated has served as financial advisor to
the Company in the past as it explored opportunities for mergers, acquisitions
or divestitures. Professional advisory fees and out-of-pocket expenses totaling
approximately $0.08 million was paid to L. E. Simmons & Associates,
Incorporated, in 2000.

14. STOCK-BASED COMPENSATION

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires the Company to record stock-based compensation at
fair value. In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock Based Compensation -- Transition and Disclosure." The Company has adopted
the disclosure requirements of SFAS No. 148 and has elected to record employee
compensation expense utilizing the intrinsic value method permitted under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees."

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The Company accounts for its employee stock-based compensation plan under
APB Opinion No. 25 and its related interpretations. Accordingly, any deferred
compensation expense would be recorded for stock options based on the excess of
the market value of the common stock on the date the options were granted over
the aggregate exercise price of the options. This deferred compensation would be
amortized over the vesting period of each option. The Company is authorized to
grant common stock based awards covering 5,700,000 shares of common stock under
the 2001 Equity Participation Plan, as amended and restated, (the Stock Option
Plan), to employees, consultants and directors with amounts, exercise prices and
vesting schedules determined by the Company's compensation committee of its
Board of Directors. Since February 2001, all option grants have been priced at
the closing price on the day of grant, vest 25% per year and have a ten-year
life. Because the exercise price of options granted under the Stock Option Plan
have been equal to or greater than the market price of the Company's stock on
the date of grant, no compensation expense related to this plan has been
recorded. Had compensation expense for its Stock Option Plan been determined
consistent with SFAS No. 123 utilizing the fair value method, the Company's net
income and earnings per share at December 31, 2002, 2001 and 2000, would have
been as follows (in thousands, except per share amounts):

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes stock option activity for each of the years
ended December 31, 2000, 2001 and 2002:

The following table summarizes information for stock options outstanding at
December 31, 2002:

At December 31, 2002, 2,894,156 options were available for future grant
under the Stock Option Plan.

The weighted average fair values of options granted during 2002, 2001, and
2000 were $5.31, $5.48, and $1.98 per share, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 2002, 2001, and 2000, respectively: risk-free interest rates of 5.2%,
5.0%, and 4.9%, no expected dividend yield, expected lives of 10.0, 8.3, and 5.3
years, and an expected volatility of 45%, 45% and 0%.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

DEFERRED COMPENSATION PLAN

The Company maintains a deferred compensation plan ("Deferred Compensation
Plan"). This plan is available to directors and certain officers and managers of
the Company. The plan allows participants to defer all or a portion of their
directors fees and/or salary and annual bonuses, as applicable, and it permits
the Company to make discretionary contributions to any participant's account.
All contributions to the participants' accounts vest immediately. The Deferred
Compensation Plan does not have dollar limits on tax-deferred contributions. The
assets of the Deferred Compensation Plan are held in a Rabbi Trust ("Trust")
and, therefore, are available to satisfy the claims of the Company's creditors
in the event of bankruptcy or insolvency of the Company. Participants have the
ability to direct the Plan Administrator to invest the assets in their accounts,
including any discretionary contributions by the Company, in Company common
stock or pre-approved mutual funds held by the Trust. In addition, participants
have the right to request that the Plan Administrator re-allocate the portfolio
of investments (i.e. cash, mutual funds, Company common stock) in the
participants' individual accounts within the Trust. Company contributions are in
the form of either cash or Company stock. Distributions from the plan are
generally made upon the participants' termination as a director and/or employee,
as applicable, of the Company. Participants receive payments from the Plan in
cash. At December 31, 2002, the balance of the assets in the Trust totaled $0.7
million, including 18,078 shares of common stock of the Company reflected as
treasury stock at a value of $0.2 million. The Company accounts for the Deferred
Compensation Plan in accordance with EITF 97-14, "Accounting for Deferred
Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and
Invested."

Assets of the Trust, other than common stock of the Company, are invested
in ten funds covering a variety of securities and investment strategies. These
mutual funds are publicly quoted and reported at market value. The Company
accounts for these investments in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Trust also holds common
shares of the Company. The Company's common stock that is held by the Trust has
been classified as treasury stock in the stockholders' equity section of the
consolidated balance sheet. The market value of the assets held by the Trust,
exclusive of the market value of the shares of the Company's common stock that
are reflected as treasury stock, at December 31, 2002 was $0.6 million and is
classified as "Other noncurrent assets" in the consolidated balance sheet.
Amounts payable to the plan participants at December 31, 2002, including the
market value of the shares of the Company's common stock that are reflected as
treasury stock, was $0.8 million and is classified as "Other liabilities" in the
consolidated balance sheet.

In accordance with EITF 97-14, all market value fluctuations of the Trust
assets have been reflected in the consolidated and combined statements of
income. Increases or decreases in the value of the plan assets, exclusive of the
shares of common stock of the Company, have been included as compensation
adjustments in the respective statements of income. Increases or decreases in
the market value of the deferred compensation liability, including the shares of
common stock of the Company held by the Trust, while recorded as treasury stock,
are also included as compensation adjustments in the consolidated and combined
statements of income. In response to the changes in total market value of the
Trust, the Company recorded net compensation expense adjustments of $0.1 million
in 2002.

15. SEGMENT AND RELATED INFORMATION

In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has identified the following
reportable segments: offshore products, wellsite services and tubular services.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Most of the
businesses were acquired as a unit, and the management at the time of the
acquisition was retained.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Financial information by industry segment for each of the three years ended
December 31, 2002, 2001 and 2000, is summarized in the following table in
thousands. The Company evaluates performance and allocates resources based on
EBITDA as defined, which is calculated as operating income plus depreciation and
amortization. Calculations of EBITDA as defined should not be viewed as a
substitute to calculations under accounting principles generally accepted in the
US, in particular operating income and net income. In addition, EBITDA
calculations by one company may not be comparable to another company. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.

Financial information by geographic segment for each of the three years
ended December 31, 2002, 2001 and 2000, is summarized below in thousands.
Revenues in the US include export sales. Revenues are attributable to countries
based on the location of the entity selling the products or performing the
services. Total assets are attributable to countries based on the physical
location of the entity and its operating assets and do not include intercompany
balances and the net assets of discontinued operations.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

One customer accounted for approximately 6% of the Company's revenues in
each of the years ended December 31, 2002 and 2001. No other customer accounted
for more than 5% of the Company's revenues in the periods presented.

16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table summarizes quarterly financial information for 2002,
2001 and 2000 (in thousands, except per share amounts):

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not equal
the total computed for the year.
- ---------------

* Represents "revenues" less "product costs" and "service and other costs"
included in the Company's consolidated and combined statements of
operations.

(1) The Company's business in the well site services segment, particularly in
Canada, is seasonal with the highest activity occurring in the winter
months.

(2) Effective February 14, 2001, the Company acquired Sooner and results of
Sooner are included from acquisition date.

17. VALUATION ALLOWANCES

Activity in the valuation accounts was as follows (in thousands):

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EXHIBIT INDEX

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* Filed herewith

** Management contracts or compensatory plans or arrangements