OIL STATES INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

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, 2004

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 4620, 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, 2004)................... $510,460,417

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 11, Common Stock, par value $.01 per share 49,583,286 shares
2005

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement for the 2005 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.

TABLE OF CONTENTS

PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 20

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 24
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 35
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 35
Item 9A. Controls and Procedures..................................... 36

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 36
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 37
Item 13. Certain Relationships and Related Transactions.............. 37
Item 14. Principal Accounting Fees and Services...................... 37

PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 37
SIGNATURES................................................................... 41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................... 43

1

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

Oil States International, Inc. (the "Company"), through its subsidiaries,
is 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.

AVAILABLE INFORMATION

The Company maintains a website with the address www.oilstatesintl.com. The
Company is not including the information contained on the Company's website as a
part of, or incorporating it by reference into, this Annual Report on Form 10-K.
The Company makes available free of charge through its website its Annual Report
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K,
and amendments to these reports, as soon as reasonably practicable after the
Company electronically files such material with, or furnishes such material to,
the Securities and Exchange Commission (SEC). The Board of Directors of the
Company documented its governance practices by adopting several corporate
governance policies. The governance policies, including the Company's corporate
governance guidelines and its code of business conduct and ethics, as well as
the charters for the committees of the Board (Audit Committee, Compensation
Committee and the Nominating and Corporate Governance Committee) may also be
viewed at the Company's website. Copies of such documents will be sent to
shareholders free of charge upon written request of the corporate secretary at
the address shown on the cover page of this Form 10-K.

In accordance with New York Stock Exchange (NYSE) Rules, on June 14, 2004,
the Company filed the annual certification by our CEO that, as of the date of
the certification, the Company was in compliance with the NYSE's corporate
governance listing standards.

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.

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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.

ACQUISITIONS

Since the completion of our initial public offering in February 2001, we
have completed 22 acquisitions for total consideration of $202 million.
Acquisitions of other oil service businesses have been an important aspect of
our growth strategy and plans to increase shareholder value.

In 2002, we acquired the following six businesses for total consideration
of approximately $72.1 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.

In 2003, we spent $16.8 million, financed with borrowings under our credit
facility, to acquire five businesses. Three of the businesses were rental tool
companies acquired for a total consideration of $10.5 million. The acquired
rental tool companies conduct operations in South Texas and Louisiana and were
combined with our existing rental tool business within our well site services
segment. The remaining two businesses, acquired for aggregate consideration of
$6.3 million, were combined with our offshore products segment.

In January 2004, we completed the acquisition of several related rental
tool companies for $34.8 million. The companies, based in South Texas, provide
thru-tubing services and ancillary equipment rentals. These companies have been
combined with our rental tool subsidiary, and report through the well site
services segment. We completed an additional acquisition of a rental tool
company in April 2004 for $4.8 million.

In May 2004, we purchased the oil country tubular goods ("OCTG")
distribution business of Hunting Energy Services, L.P., a wholly-owned affiliate
of Hunting plc, for $47.0 million, including a purchase price adjustment settled
in October 2004. In connection with the transaction, we purchased Hunting's U.S.
tubular inventory, assumed certain customer contracts and entered into supply
and distribution relationships with Hunting. Substantially all of the purchase
price was assigned to OCTG acquired. Hunting's distribution operations were
merged into our existing distribution operations in our tubular services
segment.
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In January 2005, we announced that our land drilling subsidiary, Capstar
Drilling, L.P., completed the acquisition of Elenburg Exploration Company, Inc.
("Elenburg"), a Wyoming based land drilling company, for $22.0 million. Elenburg
has a fleet of seven rigs, and provides shallow land drilling services in
Montana, Wyoming, Colorado and Utah.

All of the cash consideration utilized in our acquisitions has been funded
by cash flow and amounts available under our existing bank credit facility. See
Note 8 to the Consolidated Financial Statements.

OUR INDUSTRY

We operate in the oilfield service industry and provide 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 11 to our Consolidated 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.

Our financial results reflect the cyclical nature of the oilfield services
business. Since 2001, there have been periods of increasing and decreasing
activity in each of our operating segments.

Our Well Site Services businesses, which is significantly affected by the
North American rig count, had increased activity during 2001, saw decreased
activity in 2002 and early 2003 and has seen increasing activity from 2003
through the current period. Acquisitions and capital expenditures made in this
segment have created additional growth opportunities. In addition, the increased
activity supporting oil sands developments in northern Alberta, Canada by our
work force accommodations, catering and logistics business in this segment have
had an important impact on this segment's overall trends.

Our Offshore Products segment, which is more influenced by deepwater
development activity and rig construction and repair, experienced increased
activity during 2002 and 2003 as we shipped projects from our backlog which had
increased in 2001 and 2002. In 2004, activity in this segment slowed; however,
backlog increased during 2004.

Our Tubular Services business is influenced by some of the same factors as
our Well Site Services. In addition, during 2004, this segment was significantly
affected by increasing prices for steel products, including the oil country
tubular goods ("OCTG") we sell.

OFFSHORE PRODUCTS

OVERVIEW

During the year ended December 31, 2004, we generated approximately 21% of
our revenue and 7% of our operating income, before corporate charges, from our
offshore products segment. Through this segment, we design and manufacture a
number of cost-effective, technologically advanced products for the offshore
energy industry. In addition, we have other lower margin products and services
such as fabrication, inspection and repair services. Our products and services
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.

4

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 the
industry's 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. Our FlexJoints(R) are also used to attach the steel
catenary risers to a Spar or FPSO.

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;

5

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

- 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 guide lines.

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:

- elastomer consumable downhole products for onshore drilling and
production;

- 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. Backlog in our offshore products segment was $97.5 million at
December 31, 2004, compared to $62.6 million at December 31, 2003 and $100.1
million at December 31, 2002. We expect substantially all of our backlog at
December 31, 2004 to be completed in 2005. Our offshore products backlog
consists of firm

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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. Although our backlog is an important
indicator of future offshore products shipments and revenues, backlog as of any
particular date may not be indicative of our actual operating results for any
future period. We believe that the offshore construction and development
business is characterized by lengthy projects and a long "lead-time" order
cycle. The change in backlog levels from one period to the next does not
necessarily evidence a long-term trend.

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 2004 were
BP plc, Noble Corporation and FMC Technologies, Inc. Our main competitors
include Vetco Gray, Inc., FMC Technologies, Inc., Energy Cranes International,
Ltd. and Rolls-Royce plc.

TUBULAR SERVICES

OVERVIEW

During the year ended December 31, 2004, we generated approximately 44% of
our revenue and 39% 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
downhole casing and production tubing. Through our tubular services segment, we:

- distribute a broad range of casing and tubing;

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

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

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 and related service providers and suppliers of OCTG, 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 focused in
the United States. We purchase tubular goods from a variety of sources. However,
during 2004, we purchased from a single supplier 50% of the tubular goods we
distributed and from three suppliers approximately 69% of such tubular goods.

OCTG MARKET

Our tubular services segment primarily distributes casing and tubing.
Casing forms the structural wall in oil and gas wells to provide support and
prevent caving during drilling operations. Casing is also 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. 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. 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 six offices
and facilities located near areas of oil and gas exploration and development
activity. We have distribution relationships with most major domestic and
international steel mills.

In this business, inventory management is critical to our success. We
maintain on-the-ground inventory in 60 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 joint of pipe.

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 9001-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. We provide some of our tubular products and
services to independent and major oil and gas companies under alliance
arrangements. Although our alliances are generally not as profitable as the spot
market and can be cancelled by the customer, 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
principally to customers in the United States both for land and offshore
applications. However, we also sell for export to other countries, including
Algeria, Angola, Cabinda, Cameroon, Canada, Chad, Columbia, Congo, Ecuador,
Egypt, Guatemala, Pakistan, Trinidad, Venezuela and Yemen.

CUSTOMERS, SUPPLIERS AND COMPETITORS

Our three largest end-user customers in the tubular distribution market in
2004 were ChevronTexaco Corporation, Burlington Resources and ConocoPhillips.
Our three largest suppliers were U.S. Steel Group, Maverick Tube Corporation and
Grant Prideco. Although we have a leading market share position in tubular
services distribution, the market is highly fragmented. Our main competitors in
tubular distribution are Total Premier, Red Man Pipe & Supply Co., Inc. and
Bourland and Leverich.

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WELL SITE SERVICES

OVERVIEW

During the year ended December 31, 2004, we generated approximately 35% of
our revenue and 54% 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. In general, we expect activity levels to continue
to be highly correlated to oil and gas expenditures which is a function of many
factors that affect well economics.

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 times, at a lower cost than alternatives such as jack-up rigs. For example,
costs to mobilize and set up our hydraulic workover units are lower than
alternative equipment. Some operations on oil and gas wells under pressure
situations require the use of a hydraulic workover unit. Conversely, 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 primarily positioned to serve the U.S.
Gulf of Mexico and onshore U.S. markets, is more production oriented and is
dependent to a significant degree on the level of development and workover
activities in our market areas. We rent our equipment to major and independent
production companies and larger oil service companies to support both onshore
and offshore operations. Recent capital expenditures and acquisitions have been
more focused on onshore operations. We face competition from a diverse group of
companies including many smaller companies.

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.

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
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. However,
most wells where we perform workover service are wells with no pressure.

9

As of December 31, 2004, we had 28 "stand alone" hydraulic workover units.
Of these 28 units, 15 were located in the U.S., six were located in the Middle
East, five were located in Venezuela and two were located in West Africa. In
addition, we had labor and maintenance contracts on two non-owned hydraulic
workover units in Algeria. 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. Our utilization rate for
hydraulic workover units was 29.1% during 2004 compared to 30.7% in 2003. As of
December 31, 2004, eight of our hydraulic workover units were working or under
contract. The length of time necessary 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
10 to 12 simultaneous jobs involving our hydraulic workover units.

Our three largest customers in workover services in 2004 were Sonatrach,
ChevronTexaco Corporation and Total S.A. Our main competitors in workover
services are Halliburton Company, Cudd Pressure Control 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 10,000 feet. Drilling services are typically used
during the exploration and development stages of a field. We have a total of 18
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, one in December 2003 and one in each of February and
December 2004. Fourteen of these drilling rigs are located in Odessa, Texas and
four are located in Wooster, Ohio. As of December 31, 2004, all 18 rigs were
working or under contract. Utilization increased from 88.4% in 2003 to 90.5% in
2004. On January 31, 2005, we acquired Elenburg Exploration Company Inc. which
has a fleet of seven rigs and provides shallow drilling services in Montana,
Wyoming, Colorado and Utah.

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 2004 included Energen Resources Corporation, Apache
Corporation and Anadarko Petroleum Corporation. Our main competitors are Star
Drilling, Rodric Drilling 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;

- gravel pack operations on well bores; and,

- surface control equipment and down-hole tools utilized by coiled tubing
operators.

Our rental equipment is used during the exploration, development,
production and abandonment stages. As of December 31, 2004, we provided rental
equipment at 21 U.S. distribution points in Texas, Louisiana, Oklahoma,
Mississippi, New Mexico and Wyoming. We provide rental equipment on a day rental
basis with rates varying depending on the type of equipment and the length of
time rented.

Our three largest customers in rental equipment in 2004 were Schlumberger
Well Services, Baker Atlas and BP plc. Our competitors in rental equipment
include Boyd Oil Tool Rentals, Superior Energy Services, Inc. and Supreme Energy
Services, Inc.

Work Force Accommodations, Catering and Logistics and Modular Building
Construction. We are a large provider of integrated products and services to
support workers in remote locations, including work force accommodation, 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 in the Fort
McMurray region of Northern Canada, diamond mining in Northern Canada and other
mining ventures throughout the world, pipeline construction, forestry, offshore
construction,

10

disaster relief services and support services for military operations on a
worldwide basis. Our work force products and service operations are primarily
focused in Canada and the Gulf of Mexico although we also have catering and
facilities management activities in other international areas. During the peak
of our operating season, we typically provide these services in over 200
separate locations throughout the world with separate location populations
ranging from 20 to 2000 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 2004, our three largest customers in work force accommodations,
catering, logistics and modular building construction were Syncrude Canada Ltd,
SNC-Lavelin Group Inc. and Nabors Drilling. Our main competitors are Atco
Structures Limited, Compass Group PLC and Aramark Corporation.

EMPLOYEES

As of December 31, 2004, we had approximately 3,936 full-time employees,
31% of whom are in our offshore products segment, 67% of whom are in our well
site services segment and 2% of whom are in our tubular services segment. We are
party to collective bargaining agreements covering 662 employees located in
Canada and the United Kingdom as of December 31, 2004. 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
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 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
11

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. However, 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.

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, 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.

In the course of our operations, some of our equipment may be exposed to
naturally occurring radiation associated with oil and gas deposits, and this
exposure may result in the generation of wastes containing naturally occurring
radioactive materials or "NORM." NORM wastes exhibiting trace levels of
naturally occurring radiation in excess of established state standards are
subject to special handling and disposal requirements, and any storage vessels,
piping, and work area affected by NORM may be subject to remediation or
restoration requirements. Because many of the properties presently or previously
owned, operated, or occupied by us have been used for oil and gas production
operations for many years, it is possible that we may incur costs or liabilities
associated with elevated levels of NORM.

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.

12

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

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:

- the level of demand for and supply of oil and gas;

- 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 ability and 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 availability of attractive
drilling prospects and 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;
13

- the expected cost of developing new reserves;

- the actual cost of finding and producing oil and gas;

- the availability of attractive oil and gas field prospects which may be
affected by governmental actions or environmental activists which may
restrict drilling;

- the availability of transportation infrastructure and refining capacity;

- depletion rates;

- the level of drilling activity;

- worldwide economic activity including growth in underdeveloped countries;

- 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 OR UNSUCCESSFUL EXPLORATION RESULTS 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 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

14

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 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;

15

- 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.

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 business-to-business internet auction activities. 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.

16

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.

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, 2004, goodwill represented approximately 28% 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 4 to our Consolidated 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 2004, we purchased from a single supplier approximately 50% of the
tubular goods we distributed and from three suppliers approximately 69% 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, EXERTS SIGNIFICANT INFLUENCE ON 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 18% of the outstanding common stock of our company as of February
24, 2005. 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 exert significant influence on 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 significant influence, 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

17

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.

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.

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. SCF has sold shares recently and made stock distributions to its
partners and may continue to do so in the future. SCF's ownership percentage has
decreased from 40% at February 27, 2004 to 18% at February 23, 2005.

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 six tubular sales offices and a total of 21 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,

19

including warranty and product liability claims and 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.

On February 18, 2005, the Company announced that it had conducted an
internal investigation prompted by the discovery of over billings totaling
$439,000 by one of its subsidiaries (the "Subsidiary") to a government owned oil
company in South America. The over billings were detected by the Company during
routine financial review procedures, and appropriate financial statement
adjustments were included in its previously reported fourth quarter 2004
results. The Company and independent counsel retained by the Company's audit
committee conducted separate investigations consisting of interviews and a
thorough examination of the facts and circumstances in this matter. The Company
has voluntarily reported the results of its investigation to the Securities and
Exchange Commission (the "SEC") and will fully cooperate with any requests for
information received from the SEC.

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 2004.

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 49,583,286 shares of common stock outstanding as of February 11,
2005, including 276,183 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 11, 2005 was 58. Our common stock is traded on
the New York Stock Exchange under the ticker symbol OIS. The closing price of
our common stock on February 11, 2005 was $20.59 per share.

20

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. 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. The Company's Board of
Directors has authorized the repurchase of shares of the Company's common stock,
par value $.01 per share. The Board of Directors authorized the expenditure of
up to $50 million to repurchase shares.

EQUITY COMPENSATION PLANS

The information relating to the Company's equity compensation plans
required by Item 5 is incorporated by reference to such information as set forth
Item 12. "Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters" contained herein.

21

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 each of the five years ended December 31, 2004. 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 and other financial data
for 2000 and 2001 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, 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, 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.

(3) Our effective tax rate was affected significantly by our net operating loss
carry forwards in years prior to 2004. 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) The term EBITDA as defined consists of net income plus interest, taxes,
depreciation and amortization. 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. The Company has included EBITDA as
defined as a supplemental disclosure because its management believes that
EBITDA as defined provides useful information regarding its ability to
service debt and to fund capital expenditures and provides investors a
helpful measure for comparing its operating performance with the performance
of other companies that have different financing and capital structures or
tax rates. The Company uses EBITDA as defined to compare and to monitor the
performance of its business segments to other comparable public companies
and as one of the primary measures to benchmark for the award of incentive
compensation under its annual incentive compensation plan.

23

We believe that net 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 net income, as derived from our
financial information:

(5) 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 from
the beginning of calendar 2001 until February 14, 2001 using reorganization
accounting, which yields results similar to the pooling of interests method
and are the basis of the Combined Financial Information presented herein.
The Consolidated and Combined Financial Information presented herein
include the combined financial results of Oil States, HWC and PTI until
February 14, 2001 and the Consolidated Financial Information of the Company
thereafter.

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.

24

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, warranty claims, contract claims and discontinued operations.

The determination of impairment on long-lived assets, including goodwill,
is conducted when 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. Generally, our tubular services and well site services segments respond
more rapidly to shorter-term movements in oil and natural gas prices than our
offshore products segment. 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

25

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, which is driven
largely by our customers' outlook for longer-term future oil prices. In our well
site services business segment, we provide hydraulic well control services,
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. We
have also seen increased demand in our work force accommodation business as a
result of oil sands development activities in Northern Alberta, Canada. Through
our tubular services segment, we distribute a broad range of casing and tubing.
Sales of tubular products and services depend upon the overall level of drilling
activity, the types of wells being drilled and the level of OCTG pricing.
Historically, tubular services gross margins expand during periods of rising
OCTG prices and contract during periods of decreasing OCTG prices.

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 average North American rig count for the year ended December 31, 2004
increased 155 rigs, or 11%, compared to the year ended December 31, 2003. This
overall increase in activity, while tempered somewhat by lower activity levels
in the U.S. Gulf of Mexico did contribute to increased revenues in our well site
services segment. Our well site services results for 2004 also benefited from
acquisitions made in our rental tool business in the fourth quarter of 2003 and
in January and April of 2004 (see "Liquidity and Capital Resources" on page 30),
contributions from three newly built rigs working in West Texas, which started
working in December 2003, February 2004 and December 2004, respectively, and the
impact of pricing gains in certain business lines. The Canadian rig count was
flat between 2003 and 2004; however, our operations benefited from increased
activity in support of oil sands development and an international catering and
facilities management contract. Offshore products results weakened compared to
2003 primarily due to decreased activity and revenues during the year, which
also led to reduced cost absorption in several of the company's manufacturing
facilities. Additionally, offshore products margins were lower in 2004 compared
to 2003 due to a less favorable mix of higher margin connector products, and due
to inefficiencies associated with various facility consolidations undertaken
during 2004. However, offshore products' revenues have improved sequentially in
the most recent three quarters and margins improved from the beginning of 2004.
Backlog totaled $97.5 million at December 31, 2004, $87.3 million at September
30, 2004 and $62.6 at December 31, 2003. However, project mix in our December
31, 2004 backlog is still not weighted towards our higher margin connector
products. We believe that the offshore construction and development business is
characterized by lengthy projects and a long "lead-time" order cycle. While
change in backlog levels from one quarter to the next does not necessarily
evidence a long-term trend, we believe activity levels in our offshore products
segment will increase in future quarters, given the growth in our backlog, when
compared to December 31, 2003.

On May 11, 2004, our tubular services segment purchased the OCTG
distribution business of Hunting Energy Services, L.P. (Hunting) for $47.0
million, including a purchase price adjustment settled in October

26

2004. Under the terms of the transaction, we purchased Hunting's U.S. tubular
inventory, assumed certain customer contracts and entered into supply and
distribution relationships with Hunting. Substantially all of the purchase price
was assigned to the OCTG inventory acquired.

Our tubular services segment shipped 339.8 thousand tons of OCTG in 2004
compared to 269.0 thousand tons in 2003. Our tubular services segment benefited
during 2004 from a 18% year over year increase in average U.S. land drilling
activity, the acquisition of the Hunting OCTG distribution business and a
significant increase in OCTG prices. Tubular services margins expanded during
2004 and reached historically high levels given the significant increase in OCTG
prices coupled with strong demand. These benefits were partially offset by lower
offshore activity in the U.S. Gulf of Mexico.

During 2004, the results generated by our Canadian workforce
accommodations, catering and logistics operations benefited from strengthening
of the Canadian currency. The Canadian dollar vs. U.S. dollar conversion rate
averaged $0.77 in 2004 compared to $0.71 in 2003. The financial impact of the
stronger Canadian dollar was greater when comparing the first quarter 2004 to
2003, a period of seasonal strength in Canada. Movement in the Canadian dollar
vs. U.S. dollar exchange rates caused the majority of change in the cumulative
translation adjustment.

The Company's income tax provision for the year 2004 totaled $29.4 million,
or 33.1% of pretax income. Our effective tax rate increased in 2004 compared to
2003's effective tax rate of 24.2% because of the effect of greater NOL benefits
recognized in the earlier period. See Note 7 to the Consolidated Financial
Statements.

Management believes that fundamental oil and gas supply and demand factors
will continue to support a high level of drilling activity in North America over
time which should continue to positively impact the Company, particularly its
well site services and tubular services businesses. We believe that oil and gas
producers have increased their view of longer term oil and gas prices based on
current supply and demand fundamentals, even though they are still at levels
below current prices. As a result, our customers could increase their spending
on deepwater offshore exploration and development which should benefit our
offshore products segment. However, there can be no assurance that these
expectations will be realized.

27

CONSOLIDATED RESULTS OF OPERATIONS

28

Within our well site services segment, we have four reportable business
units as follows:

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003

Revenues. Revenues increased $247.3 million, or 34.2%, to $971.0 million
during the year ended December 31, 2004 compared to revenues of $723.7 million
during the year ended December 31, 2003. Tubular services revenues and tons
shipped increased $191.6 million, or 81.3%, and 70.8 thousand tons, or 26.3%,
respectively, in the year ended December 31, 2004 compared to revenues and tons
shipped in the year ended December 31, 2003 due to increased industry demand,
higher OCTG prices, and contributions from the acquisition of the Hunting OCTG
distribution business which was closed in May 2004. Well site services revenues
increased $80.8 million, or 31.6%, while offshore products revenues decreased
$25.1 million, or 10.8%, during the same period. Well site services revenues
increased compared to the prior year due primarily to increased drilling
activity in the United States, increased oil sands development activity in
Canada, an international catering and facilities management contract, favorable
Canadian dollar exchange rates, the impact of capital expenditures made since
December 31, 2003 and rental tool acquisitions which were acquired for total
consideration of $50.1 million. These rental tool acquisitions were completed in
the fourth quarter of 2003 and in January and April of 2004. Offshore products
revenues decreased as a result of lower activity supporting offshore production
facility construction given the typical lengthy time period between offshore
discoveries and installation of production facilities.

29

Gross Margin. Our gross margins, which we calculate before a deduction for
depreciation expense, increased $45.8 million, or 30.4%, from $150.6 million in
the year ended December 31, 2003 to $196.4 million in the year ended December
31, 2004. Our overall gross margin as a percent of revenues was essentially flat
in the current year compared to 2003. Well site services gross margins increased
$27.2 million, or 33.6%, to $108.1 million in the year ended December 31, 2004
compared to the year ended December 31, 2003. Within our well site services
segment, our shallow drilling and specialty rental tool businesses' gross
margins increased $4.3 million, or 42.1%, and $9.0 million, or 42.4%,
respectively, during the year ended December 31, 2004 compared to the year 2003.
Three drilling rigs were added in our shallow drilling business (added in
December 2003, February 2004 and December 2004). In addition, we realized higher
utilization and footage drilling rates for all of our drilling rigs and
contributions from rental tool acquisitions completed in the fourth quarter of
2003 and in January and April 2004. Also in well site services, our work force
accommodations, catering and logistics services and modular building
construction services gross margins increased by $14.8 million, or 36.4%, in the
year ended December 31, 2004 compared to the year ended December 31, 2003
primarily because of increased camp and catering activity supporting oil sands
development in Canada and an international catering and facilities management
contract. Our hydraulic workover gross margins decreased by $0.9 million, or
10.8%, as a result of decreased utilization, especially in West Africa and the
Middle East. Our well site services gross margin percent increased slightly to
32.1% in the year ended December 31, 2004 compared to 31.6% in the year ended
December 31, 2003.

Offshore products gross margins decreased $18.4 million, or 32.9%, from
$56.0 million in the year ended December 31, 2003 to $37.6 million in the year
ended December 31, 2004 due to decreased activity, reduced fixed cost absorption
and inefficiencies associated with various facilities consolidations undertaken
during 2004. Additionally, offshore products margins were lower in the current
period compared to last year due to a less favorable mix of higher margin
connector products. These factors caused offshore products gross margin percent
to decline from 24.1% of revenues in the year 2003 to 18.2% in the year 2004.

Tubular services gross margins increased to $50.7 million, or 11.9% of
tubular services revenues, in the year ended December 31, 2004 compared to $13.7
million, or 5.8% of tubular services revenues, in the year ended December 31,
2003 as a result of increased oil and gas drilling activity which increased
demand for our tubular products and services, a significant increase in OCTG
prices during 2004 and the acquisition of the OCTG distribution business of
Hunting for $47.0 million in May 2004, including a purchase price adjustment
settled in October 2004. Tubular services margins expanded during 2004 and
reached historically high levels given the significant increase in OCTG prices
coupled with strong demand.

Selling, General and Administrative Expenses. During the year ended
December 31, 2004, selling, general and administrative expenses (SG&A) totaled
$64.8 million, or 6.7% of revenues, compared to SG&A of $57.7 million, or 8.0%
of revenues, for the year ended December 31, 2003. SG&A expense increased
primarily as a result of acquisitions completed in 2003 and 2004, higher
postretirement benefit costs in the current year due to the recording of a gain
upon settlement of plan liabilities in the prior year, higher professional fees
and higher bonus accruals under the incentive compensation plan. The increase in
professional fees was largely attributable to costs associated with
Sarbanes-Oxley compliance.

Depreciation and Amortization. Depreciation and amortization expense
increased $8.1 million in 2004 compared to 2003 due primarily to acquisitions of
businesses completed since 2003 and capital expenditures made in the past year.

Operating Income. Our operating income represents revenues less (i) cost
of sales, (ii) selling, general and administrative expenses, (iii) depreciation
and amortization expense, and (iv) other operating expense (income). Our
operating income increased $29.9 million, or 45.9%, to $95.1 million for the
year ended December 31, 2004 from $65.2 million for the year ended December 31,
2003. Well site services operating income increased $18.3 million during the
period. Offshore products operating income decreased $20.7 million while tubular
services operating income increased $34.9 million. Corporate and other charges
increased by $2.6 million in the current period.

Interest Expense. Interest expense was lower by $0.2 million in the year
ended December 31, 2004 compared to the year ended December 31, 2003. Increased
interest expense attributable to higher debt levels
30

resulting from acquisitions completed during the first half of 2004 and higher
interest rates in 2004 was more than offset by lower debt issuance cost
amortization compared to the prior period.

Income Tax Expense. Income tax expense totaled $29.4 million, or 33.1% of
pretax income, during the year ended December 31, 2004 compared to $14.2
million, or 24.2% of pretax income, during the year ended December 31, 2003. See
"Tax Matters" discussion following.

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Revenues. Revenues increased $106.9 million, or 17.3%, to $723.7 million
during the year ended December 31, 2003 compared to revenues of $616.8 million
during the year ended December 31, 2002. Well site services revenues increased
$46.3 million, or 22.1%, and offshore products revenues increased $41.3 million,
or 21.7%, during the same period. Well site services revenues increased compared
to the prior year primarily due to increased drilling activity in Canada and the
United States, favorable Canadian dollar exchange rates, which strengthened
compared to the U.S. dollar in 2003 compared to 2002 resulting in an increase of
approximately $14.0 million, and the impact of acquisitions completed in the
third quarter of 2002. Canadian expenses were also impacted by exchange rate
movements in 2003 compared to 2002 and offset some of these revenue gains.
Offshore products revenues increased primarily as a result of greater activity
supporting offshore production facility construction, primarily in the U.S. Gulf
of Mexico, and the impact of acquisitions completed in the third quarter of
2002. Tubular services revenues increased $19.3 million, or 8.9%, in the year
ended December 31, 2003 compared to the prior year. This revenue increase
resulted from greater quantities shipped caused by higher rig counts partially
offset by lower international sales and reduced revenue per ton shipped caused
by product mix oriented to shallow land drilling.

Gross Margin. Our gross margins, which we calculate before a deduction for
depreciation expense, increased $20.8 million, or 16.0%, from $129.8 million in
the year ended December 31, 2002 to $150.6 million in the year ended December
31, 2003.

Well site services gross margins increased $17.8 million, or 28.2%, to
$80.9 million in the year ended December 31, 2003. Within our well site services
segment, shallow drilling and specialty rental tool businesses' gross margins
increased $4.0 million, or 61.9%, and $3.0 million, or 16.2%, respectively,
during the year ended December 31, 2003 compared to the year ended December 31,
2002 primarily as a result of rigs added to the fleet and the rental tool
acquisitions completed. Also in the well site services segment, our work force
accommodations, catering and logistics services and modular building
construction services gross margins increased by $11.1 million, or 37.5%, during
the year ended December 31, 2003 compared to the year ended December 31, 2002
because of increased camp and catering activity in Canada and an international
catering and facilities management contract. Our hydraulic workover gross
margins decreased by $0.3 million, or 2.3%, as a result of decreased activity in
Venezuela and a reclassification of certain field expenses, formerly classified
as selling, general and administrative expenses, to operating expense. These
decreases were almost fully offset by increased gross margin from work in
Algeria, which commenced in late 2002. Gross margin as a percent of revenues in
well site services increased from 30.1% in 2002 to 31.6% in 2003 primarily
because of more profitable accommodations operations caused by higher activity
levels.

Offshore products gross margins increased $3.1 million, or 5.9%, from $52.9
million in the year ended December 31, 2002 to $56.0 million during 2003
primarily due to increased revenues from shipments and work in progress. Our
offshore products gross margin percentage declined by 3.7% due primarily to a
greater percentage of lower-margin fabrication work compared to the prior period
and to certain project losses incurred in our subsea pipeline operations and to
reduced margins in our winch and crane businesses. Tubular services gross
margins decreased to $13.7 million, or 5.8% of tubular services revenues in the
year ended December 31, 2003 compared to $13.8 million, or 6.4% of tubular
services revenues, in the year ended December 31, 2002 as a result of higher
margin sales during 2002, especially in the fourth quarter, and foreign sales,
which occurred primarily in the first half of 2002, and did not reoccur in 2003.

Selling, General and Administrative Expenses. During the year ended
December 31, 2003, selling, general and administrative expenses (SG&A) totaled
$57.7 million, or 8.0% of revenues, compared to SG&A of $51.8 million, or 8.4%
of revenues, for the year ended December 31, 2002. Increased SG&A expense
31

primarily resulted from acquisitions completed in the third quarter of 2002.
This increase was only partially offset by lower post employment benefit costs
caused by the settlement of certain plan liabilities during 2003.

Depreciation and Amortization. Depreciation and amortization expense
increased $4.6 million in 2003 compared to 2002 due primarily to acquisitions of
businesses completed in 2002 and capital expenditures made in 2002 and 2003.

Operating Income. Our operating income represents revenues less (i) cost
of sales, (ii) selling, general and administrative expenses and (iii)
depreciation and amortization expense plus other operating income. Our operating
income increased $10.6 million, or 19.4%, to $65.2 million for the year ended
December 31, 2003 from $54.6 million during 2002. Well site services operating
income increased by $9.8 million, or 35.8%, while offshore products operating
income increased by $0.6 million, or 2.2%. Tubular Services operating income was
$6.0 million during the year ended December 31, 2003 compared to $5.4 million
for the year ended December 31, 2002, an increase of $0.6 million, or 11.1%.
Corporate and other charges increased by $0.4 million in 2003 compared to 2002.

Interest Expense. Interest expense increased $3.0 million, or 61.2%, to
$7.9 million for the year ended December 31, 2003 compared to $4.9 million for
the year ended December 31, 2002. Increased interest expense was attributable to
higher debt levels resulting from acquisitions completed during the third
quarter of 2002, capital expenditures made during 2002 and 2003 and the
write-off of $1.2 million, after taxes, of unamortized debt issue costs in the
fourth quarter of 2003 upon the closing of a new bank credit agreement.

Income Tax Expense. Income tax expense totaled $14.2 million, or 24.2% of
pretax income, during the year ended December 31, 2003 compared to $11.4
million, or 22.3% of pretax income, during the year ended December 31, 2002.
Decreased amounts of net operating loss carryforwards available to offset
taxable income resulted in a higher annual effective tax rate for the year 2003
compared to 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are to fund capital expenditures, such as
expanding and upgrading our manufacturing facilities and equipment, building new
drilling rigs, increasing and replacing rental tool and workover assets, and our
accommodation units, funding new product development and funding 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
and proceeds from borrowings under our bank facilities.

Cash was provided by operations during the year ended December 31, 2004 and
2003 in the amounts of $97.2 million and $58.7 million, respectively. Cash
provided by operations in 2004 was generated by our net income plus depreciation
and amortization, net of working capital changes during 2004. Working capital
changes used $6.4 million of operating cash flow in the year 2004 compared to
$17.4 million in the comparable period in 2003.

Cash was used in investing activities during the years ended December 31,
2004 and 2003 in the amount of $137.7 million and $54.9 million, respectively.
Capital expenditures totaled $60.0 million and $41.3 million during the years
ended December 31, 2004 and 2003, respectively. Capital expenditures in both
years consisted principally of purchases of assets for our well site services
businesses and for consolidation of our offshore products manufacturing
capacity. Acquisitions totaled $80.8 million during the year ended December 31,
2004. During 2004, the Company completed the acquisition of several rental tool
companies $37.8 million, net of cash acquired. These companies have been merged
into our rental tool subsidiary, and report through the well site services
segment. In addition, we acquired the OCTG distribution business of Hunting
which required a cash outlay of $47.0 million in 2004. These acquisitions
resulted in increased working capital investments, particularly accounts
receivable and inventory. We expect to fund future capital expenditures with
internally generated funds and proceeds from borrowings under our revolving
credit facilities.

Net cash of $38.8 million was provided by financing activities during the
year ended December 31, 2004, primarily as a result of revolving credit
borrowings which were utilized to fund acquisitions.

32

Our primary bank credit facility (the Credit Agreement) was amended,
effective January 31, 2005, to increase our availability under the facility from
$250 million to $325 million and extend the maturity from October 30, 2007 to
January 31, 2010. The Credit Agreement contains customary financial covenants
and restrictions, including restrictions on our ability to declare and pay
dividends. Borrowings under the Credit Agreement are secured by a pledge of
substantially all of our assets and the assets of our subsidiaries, and our
obligations under the Credit Agreement are guaranteed by our significant
subsidiaries. Borrowings under the Credit Agreement accrue interest at a rate
equal to either LIBOR or another benchmark interest rate (at our election) plus
an applicable margin based on our leverage ratio (as defined in the Credit
Agreement). Our average borrowing rate for balances outstanding during 2004 was
3.6%. We must pay a quarterly commitment fee, based on our leverage ratio, on
the unused commitments under the Credit Agreement.

As of December 31, 2004, we had $172.6 million outstanding under the Credit
Agreement and an additional $10.8 million of outstanding letters of credit,
leaving $66.6 million available to be drawn under the facility. In addition, we
have other floating rate bank credit facilities in the U.S. and the U.K. that
provide for an additional aggregate borrowing capacity of $8.8 million. We had
no borrowings outstanding under these facilities as of December 31, 2004. Our
total debt represented 24.7% of our total capitalization at December 31, 2004.
With the amended credit facility effective January 31, 2005, our availability
has increased to approximately $126 million as of February 14, 2005, which is
after the funding of our acquisition of Elenburg Exploration Company, Inc. for
total consideration of $22 million (including cash of $21.3 million) on February
1, 2005. The Company's Board of Directors has authorized the repurchase of
shares of the Company's common stock, par value $.01 per share. The Board of
Directors authorized the expenditure of up to $50 million to repurchase shares.

We believe that cash from operations and available borrowings under our
credit facilities will be sufficient to meet our liquidity needs for the
foreseeable future. If our plans or assumptions change or are inaccurate, or we
make further 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.

The following summarizes our debt and lease obligations at December 31,
2004 (in thousands):

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

(1) The Company amended its bank credit agreement, effective January 31, 2005,
to extend the maturity to the year 2010. See Note 5 to the Consolidated
Financial Statements.

Our debt obligations at December 31, 2004 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
subsequent to December 31, 2004. We do not have any off balance sheet
arrangements.

TAX MATTERS

Our primary deferred tax asset, which totaled approximately $12.5 million
at December 31, 2004, is related to $35.8 million in available federal net
operating loss carryforwards, or NOLs, as of that date. A valuation allowance of
approximately $5.1 million was provided against the deferred tax asset
associated with our NOLs at December 31, 2004. The NOLs will expire in varying
amounts during the years 2008 through 2020 if they are not first used to offset
taxable income that we generate. Our ability to utilize a significant portion of
the available NOLs is currently limited under Section 382 of the Internal
Revenue Code due to a change of control that occurred during 1995. A successive
change in control was triggered in 2003 pursuant to Section 382; however, it did
not significantly change our NOL utilization expectations.

33

Our income tax provision for the year ended December 31, 2004 totaled $29.4
million, or 33.1% of pretax income. The income tax provision for the year 2004
included a $6.9 million income tax benefit related to the partial reversal of
the valuation allowance applied against NOLs which were recorded as of the prior
year end. Based upon positive earnings that we have generated for both financial
and tax reporting purposes since our formation, we believed that we would more
likely than not generate sufficient taxable income in future years to realize
the benefit of all but $5.1 million of the deferred tax asset associated with
these net operating losses. Following the recognition of the $6.9 million income
tax benefit during the year 2004, we have recognized the associated income tax
benefit, on a cumulative basis, of approximately $21.2 million of our $35.8
million of available federal net operating loss carryforwards.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46) and, in December 2003, an amendment -- FIN
46(R) ("FIN 46") entitled, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51." FIN 46 provides guidance on: 1) the
identification of entities for which control is achieved through means other
than through voting rights, known as "variable interest entities" (VIEs); and 2)
which business enterprise is the primary beneficiary and when it should
consolidate a VIE. This new requirement for consolidation applies to entities:
1) where the equity investors (if any) do not have a controlling financial
interest; or 2) whose equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. FIN 46 is effective for all new VIEs created or
acquired after January 31, 2003. For VIEs created or acquired prior to February
1, 2003, the provisions of FIN 46 must be applied for the first interim or
annual period ending after December 15, 2003. Implementation of FIN 46 did not
affect us.

In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs -- an amendment of ARB 43, Chapter 4" ("SFAS
151"). SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. Paragraph 5 of Accounting
Research Bulletin ("ARB") 43, Chapter 4 "Inventory Pricing," previously stated
that "...under certain circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs may be so abnormal as
to require treatment as current-period charges..." SFAS 151 requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, SFAS 151 requires that the
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. SFAS 151 is effective for
fiscal years beginning after June 15, 2005. The Company does not believe the
implementation of SFAS 151 will have a material impact on the Company's
financial position, results of operations or cash flows.

In December 2004, The FASB issued two FASB Staff Positions (FSP's) that
provide accounting guidance on how companies should account for the effects of
the American Jobs Creation Act of 2004 (the Act) that was signed into law on
October 22, 2004. The Act could affect how companies report their deferred
income tax balances. The first FSP is FSP FAS 109-1 (FAS 109-1); the second is
FSP FAS 109-2 (FAS 109-2). In FAS 109-1, the FASB concludes that the tax relief
(special tax deduction for domestic manufacturing) from the Act should be
accounted for as a "special deduction" instead of a tax rate reduction. FAS
109-2 gives a company additional time to evaluate the effects of the Act on any
plan for reinvestment or repatriation of foreign earnings for purposes of
applying FASB Statement No. 109, "Accounting for Income Taxes." However,
companies must provide certain disclosures if it chooses to utilize the
additional time granted by the FASB. The company is still evaluating the impact,
if any, these FSP's may have on its results of operations, financial condition
or cash flows.

On December 16, 2004, the FASB issued FASB Statement No. 123 (revised
2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No.
95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However, Statement 123(R)
requires all share-based payments
34

to employees, including grants of employee stock options, to be recognized in
the income statement based on their fair values. Pro forma disclosure is no
longer an acceptable alternative.

Statement 123(R) must be adopted no later than July 1, 2005. We expect to
adopt Statement 123(R) on July 1, 2005. The Company plans to adopt Statement
123(R) using the modified-prospective method, whereby compensation cost is
recognized beginning with the effective date (a) based on the requirements of
Statement 123(R) for all share-based payments granted after the effective date
and (b) based on the requirements of Statement 123(R) for all awards granted to
employees prior to the effective date of Statement 123(R) that remain unvested
on the effective date.

As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using the APB No. 25 intrinsic value method
and, as such, generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will
have an impact on our results of operations, although it will have no impact on
our overall financial position. Had we adopted SFAS No. 123(R) in prior periods,
the impact of that standard would have approximated the impact of SFAS No. 123
as described in the disclosure of pro forma net income and earnings per share in
Note 10 of the consolidated financial statements in this Annual Report on Form
10-K. Statement No 123(R) also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after adoption. While the
company cannot estimate what those amounts will be in the future (because they
depend on, among other things, when employees exercise stock options), the
amount of operating cash flows recognized in prior periods for such excess tax
deductions for stock option exercises were $1.1 million, $1.8 million and $0.4
million in 2004, 2003 and 2002, respectively.

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, 2004, we had floating rate obligations totaling approximately
$172.6 million for amounts borrowed under our revolving credit facilities. 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, 2004 levels, our consolidated
interest expense would increase by a total of approximately $1.7 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 exchange rates when
transactions are denominated in currencies other than the U.S. dollar, which is
our functional currency, or the functional currency of our subsidiaries, which
is not necessarily the U.S. dollar. 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. During 2004, we realized foreign exchange losses of $1.3 million
primarily as a result of the strengthening of the UK pound versus the U.S.
dollar. These losses are included in other operating expense (income) in the
consolidated statements of income. Our UK subsidiary had U.S. dollar denominated
receivables and U.S. dollar cash balances that resulted in the majority of our
foreign exchange losses during 2004.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and supplementary data of the Company
appear on pages 41 through 66 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 12 to our Consolidated Financial Statements, which is
incorporated herein by reference.

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.

35

ITEM 9A. CONTROLS AND PROCEDURES

(i) DISCLOSURE CONTROLS AND PROCEDURES

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 as of December
31, 2004 to ensure that material information was accumulated and communicated to
the Company's management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.

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.

(II) INTERNAL CONTROL OVER FINANCIAL REPORTING

(a) Management's annual report on internal control over financial
reporting.

The Company's management report on internal control over financial
reporting is set forth in this Annual Report on Form 10K on Page 42 and is
incorporated herein by reference.

(b) Attestation report of the registered public accounting firm.

The attestation report of Ernst & Young LLP, the Company's independent
registered public accounting firm, on management's assessment of the
effectiveness of the Company's internal control over financial reporting and the
effectiveness of the Company's internal control over financial reporting is set
forth in this Annual Report on Form 10K on Page 44 and is incorporated herein by
reference.

(c) Changes in internal control over financial reporting.

There was no change in the Company's internal control over financial
reporting during the Company's fourth fiscal quarter ended December 31, 2004
that has materially affected, or is reasonably likely to affect, the Company's
internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(1) Information concerning directors, including the Company's audit
committee financial expert, appears in the Company's Definitive Proxy Statement
for the 2005 Annual Meeting of Stockholders, under "Election of Directors." This
portion of the Definitive Proxy Statement is incorporated herein by reference.

(2) Information with respect to executive officers appears in the Company's
Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders, under
"Executive Officers of the Registrant." This portion of the Definitive Proxy
Statement is incorporated herein by reference.

(3) Information concerning Section 16(a) beneficial ownership reporting
compliance appears in the Company's Definitive Proxy Statement for the 2005
Annual Meeting of Stockholders, under "Section 16(a) Beneficial Ownership
Reporting Compliance." This portion of the Definitive Proxy Statement is
incorporated herein by reference.

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 2005 Annual Meeting of Stockholders.

36

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 2005 Annual Meeting of Stockholders.

The table below provides information relating to our equity compensation
plans as of December 31, 2004:

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

* Relates to the Oil States International, Inc. 2001 Equity Participation Plan,
as amended and restated. Our Board of Directors has approved an amendment to
this plan to increase the number of shares authorized for issuance thereunder
from 5,700,000 to 7,700,000. This increase, which is subject to stockholder
approval, will be considered by our stockholders at the 2005 Annual Meeting.

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

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 2005 Annual Meeting of Stockholders.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information concerning principal accountant fees and services and the audit
committee's preapproval policies and procedures appear in the Company's
Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders under the
heading "Fees Paid to Ernst & Young LLP" and is incorporated herein by
reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

(1) Financial Statements: Reference is made to the index set forth on
page 41 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 Consolidated Financial Statements or the Notes thereto, or the
required information is inapplicable.

(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.

37

(b) Index of Exhibits

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

* Filed herewith

** Management contracts or compensatory plans or arrangements

*** Furnished herewith.

40

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 1, 2005.

42

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Management's Annual Report on Internal Control Over
Financial Reporting....................................... 44
Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements......................... 45
Report of Independent Registered Public Accounting Firm on
Management's Assessment of the Effectiveness of the
Company's Internal Control Over Financial Reporting and on
the Effectiveness of the Company's Internal Control Over
Financial Reporting....................................... 46
Consolidated Statements of Income for the Years Ended
December 31, 2004, 2003, and 2002......................... 47
Consolidated Balance Sheets at December 31, 2004 and 2003... 48
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended December 31,
2004, 2003 and 2002....................................... 49
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003, and 2002......................... 50
Notes to Consolidated Financial Statements.................. 51

43

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

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

The management of Oil States International, Inc. is responsible for
establishing and maintaining adequate internal control over financial reporting.
Oil States International, Inc.'s internal control system was designed to provide
reasonable assurance to the Company's management and Board of Directors
regarding the preparation and fair presentation of published financial
statements.

All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.

Oil States International, Inc. management assessed the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004. In
making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control -- Integrated Framework. Based on our assessment we believe that, as of
December 31, 2004, the Company's internal control over financial reporting is
effective based on those criteria.

Oil States International, Inc.'s independent registered public accounting
firm has audited our assessment of the Company's internal control over financial
reporting. This report appears on Page 46.

OIL STATES INTERNATIONAL, INC.

Houston, Texas
March 1, 2005

44

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO 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 (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of income, stockholders' equity
and comprehensive income, and cash flows for each of the three years in the
period ended December 31, 2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2004 and 2003, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 1, 2005 expressed an unqualified opinion thereon.

ERNST & YOUNG LLP

Houston, Texas
March 1, 2005

45

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Oil States International, Inc. and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004 is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004 based on the
COSO criteria.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the accompanying
consolidated balance sheets of the Company as of December 31, 2004 and 2003 and
the related consolidated statements of income, stockholders' equity and other
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2004 and our report dated March 1, 2005 expressed an
unqualified opinion thereon.

ERNST & YOUNG LLP

Houston, Texas
March 1, 2005

46

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these financial statements.
47

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements.
48

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME

The accompanying notes are an integral part of these financial statements.
49

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED 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. Investments in unconsolidated affiliates, in which the Company is
able to exercise significant influence, are accounted for using the equity
method. On February 14, 2001, the Company acquired three companies (HWC Energy
Services, Inc. -- HWC; PTI Group, Inc. -- PTI and Sooner Inc. -- Sooner). All
significant intercompany accounts and transactions between the Company and its
consolidated subsidiaries have been eliminated in the accompanying consolidated
financial statements. The Company is principally comprised of the following
entities and their respective subsidiaries.

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, winches, mooring and
lifting systems, 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, Europe, the Middle
East 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.

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. 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.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, spare parts for manufactured equipment and supplies for remote
accommodation facilities. Inventories include raw materials, labor, and
manufacturing overhead and are carried at the lower of cost or market. The cost
of inventories is determined on an average cost or specific-identification
method.

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. Goodwill is
stated net of accumulated amortization of $18.3 million and $18.0 million at
December 31, 2004 and 2003, respectively. The amount of accumulated amortization
of goodwill increased in 2004 compared to 2003 because of changes in foreign
currency exchange rates.

IMPAIRMENT OF LONG-LIVED ASSETS

In compliance with Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" 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.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FOREIGN EXCHANGE RISK

A portion of revenues, earnings and net investments in foreign affiliates
are exposed to changes in foreign exchange rates. We seek to manage our foreign
exchange risk in part through operational means, including managing expected
local currency revenues in relation to local currency costs and local currency
assets in relation to local currency liabilities. Foreign exchange risk is also
managed through the use of derivative financial instruments and foreign currency
denominated debt. These financial instruments serve to protect net income
against the impact of the translation into U.S. dollars of certain foreign
exchange denominated transactions. The financial instruments employed to manage
foreign exchange risk consisted of forward exchange contracts with notional
amounts of $5 million at December 31, 2003. The Company had no such contracts
outstanding at December 31, 2004. Net gains or losses from foreign currency
exchange contracts that are designated as hedges are recognized in the income
statement to offset the foreign currency gain or loss on the underlying
transaction. Exchange gains and losses have totaled $1.3 million loss in 2004, a
$0.2 million gain in 2003 and a $0.1 million loss in 2001 and are included in
other operating expense (income).

REVENUE AND COST RECOGNITION

Revenue from the sale of products, not accounted for utilizing the
percentage of completion method, is recognized when delivery to and acceptance
by the customer has occurred, when title and all significant risks of ownership
have passed to the customer, collectibility is probable and pricing is fixed and
determinable. Our product sales terms do not include significant post delivery
obligations. For significant projects built to customer specifications, revenues
are recognized under the percentage-of-completion method, measured by the
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 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, CONCENTRATION OF SUPPLIERS

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.

We purchased 69% of our oilfield tubular goods from three suppliers in
2004, with the largest supplier representing 50% of our purchases in the period.
The loss of any significant supplier in our tubular services segment could
adversely affect us.

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.

EARNINGS PER SHARE

The Company's basic income per share (EPS) amounts have been computed based
on the average number of common shares outstanding, including 277,183 and
340,971 shares of common stock as of December 31, 2004 and 2003, 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 connection with the Company's IPO and the combination of
PTI into the Company, 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. 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 were considered to be
compensatory in nature. Accordingly, the Company recognized $0.3 million of
non-cash general and administrative expenses for that award in each of the two
years ended December 31, 2003 and less than $0.1 million in 2004. An additional
$0.1 million was recognized in 2004 and

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2003 for a stock option performance award. 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 10.

GUARANTEES

The Company adopted FASB Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Indebtedness of Others," during 2003. FIN 45 requires disclosures and accounting
for the Company's obligations under certain guarantees.

Pursuant to FIN 45, the Company is required to disclose the changes in
product warranty reserves. Some of our products in our offshore products and
accommodations businesses are sold with a warranty, generally between 12 to 18
months. Parts and labor are covered under the terms of the warranty agreement.
Warranty provisions are based on historical experience by product, configuration
and geographic region.

Changes in the warranty reserves were as follows (in thousands):

Current warranty provisions are typically related to the current year's
sales, while warranty consumption is associated with current and prior year's
net sales. During 2004, the Company recorded a $1.0 million increase in its
warranty reserves related to a potential warranty claim associated with an
international subsea pipeline project installed during 2000 in addition to
smaller accruals of a more recurring nature.

During the ordinary course of business, the Company also provides standby
letters of credit or other guarantee instruments to certain parties as required
for certain transactions initiated by either the Company or its subsidiaries. As
of December 31, 2004, the maximum potential amount of future payments that the
Company could be required to make under these guarantee agreements was
approximately $11.1 million. The Company has not recorded any liability in
connection with these guarantee arrangements beyond that required to
appropriately account for the underlying transaction being guaranteed. The
Company does not believe, based on historical experience and information
currently available, that it is probable that any amounts will be required to be
paid under these guarantee arrangements.

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

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized on the percentage-of-completion method, the valuation allowance
recorded on net deferred tax assets, warranty, inventory and bad debt reserves.
Actual results could differ from those estimates.

DISCONTINUED OPERATIONS

Prior to our initial public offering in February 2001, we sold businesses
and reported the operating results of those businesses as discontinued
operations. Existing reserves related to the discontinued operations as of
December 31, 2004 and 2003 represent an estimate of the remaining contingent
liabilities associated with the Company's exit from those businesses.

3. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

Additional information regarding selected balance sheet accounts at
December 31, 2004 and 2003, is presented below (in thousands):

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. 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 the unit's fair
value. The Company uses comparative market multiples to establish fair values.

The Company amortizes 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
impairment was required based on the evaluations performed.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Changes in the carrying amount of goodwill for the year ended December 31,
2004 and 2003, are as follows (in thousands):

Goodwill deductible for tax purposes totals approximately $18.6 million at
December 31, 2004. The following table presents the total amount assigned and
the total amount amortized for major intangible asset classes as of December 31,
2004 and 2003 (in thousands):

The weighted average remaining amortization period for all intangible
assets, other than goodwill, is 3.6 years and 4.4 years as of December 31, 2004
and 2003, respectively. Total amortization expense is expected to be $2.3
million, $2.2 million and $1.7 million in 2005, 2006 and 2007, respectively.

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46) and, in December 2003, an amendment -- FIN
46(R) ("FIN 46") entitled, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51." FIN 46 provides guidance on: 1) the
identification of entities for which control is achieved through means other
than through voting rights, known as "variable interest entities" (VIEs); and 2)
which business enterprise is the primary beneficiary and when it should
consolidate a VIE. This new requirement for consolidation applies to entities:
1) where the equity investors (if any) do not have a controlling financial
interest; or 2) whose equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. FIN 46 is effective for all new VIEs created or
acquired after January 31, 2003. For VIEs created or acquired prior to February
1, 2003, the provisions of FIN 46 must be applied for the first interim or
annual period ending after December 15, 2003. Implementation of FIN 46 did not
affect the Company.

In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs -- an amendment of ARB 43, Chapter 4" ("SFAS
151"). SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. Paragraph 5 of Accounting
Research Bulletin ("ARB") 43, Chapter 4 "Inventory Pricing," previously stated
that "...under certain circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs may be so abnormal as
to require treatment as current-period charges..." SFAS 151 requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal."
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition, SFAS 151 requires that the allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production
facilities. SFAS 151 is effective for fiscal years beginning after June 15,
2005. The Company does not believe the implementation of SFAS 151 will have a
material impact on the Company's financial position, results of operations or
cash flows.

In December 2004, The FASB issued two FASB Staff Positions (FSP's) that
provide accounting guidance on how companies should account for the effects of
the American Jobs Creation Act of 2004 (the Act) that was signed into law on
October 22, 2004. The Act could affect how companies report their deferred
income tax balances. The first FSP is FSP FAS 109-1 (FAS 109-1); the second is
FSP FAS 109-2 (FAS 109-2). In FAS 109-1, the FASB concludes that the tax relief
(special tax deduction for domestic manufacturing) from the Act should be
accounted for as a "special deduction" instead of a tax rate reduction. FAS
109-2 gives a company additional time to evaluate the effects of the Act on any
plan for reinvestment or repatriation of foreign earnings for purposes of
applying FASB Statement No. 109, "Accounting for Income Taxes." However,
companies must provide certain disclosures if they choose to utilize the
additional time granted by the FASB. The company is still evaluating the impact,
if any, these FSP's may have on its results of operations, financial condition
or cash flows.

On December 16, 2004, the FASB issued FASB Statement No. 123 (revised
2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No.
95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However, Statement 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an acceptable alternative.

Statement 123(R) must be adopted no later than July 1, 2005. We expect to
adopt Statement 123(R) on July 1, 2005. The Company plans to adopt Statement
123(R) using the modified-prospective method, whereby compensation cost is
recognized beginning with the effective date (a) based on the requirements of
Statement 123(R) for all share-based payments granted after the effective date
and (b) based on the requirements of Statement 123(R) for all awards granted to
employees prior to the effective date of Statement 123(R) that remain unvested
on the effective date.

As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using the APB No. 25 intrinsic value method
and, as such, generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will
have an impact on our results of operations, although it will have no impact on
our overall financial position. Had we adopted SFAS No. 123(R) in prior periods,
the impact of that standard would have approximated the impact of SFAS No. 123
as described in the disclosure of pro forma net income and earnings per share in
Note 10 of this Annual Report on Form 10-K. Statement No 123(R) also requires
the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While the company cannot estimate what those
amounts will be in the future (because they depend on, among other things, when
employees exercise stock options), the amount of operating cash flows recognized
in prior periods for such excess tax deductions for stock option exercises were
$1.1 million, $1.8 million and $0.4 million in 2004, 2003 and 2002,
respectively.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LONG-TERM DEBT

As of December 31, 2004 and 2003, long-term debt consisted of the following
(in thousands):

Scheduled maturities of combined long-term debt as of December 31, 2004,
are as follows (in thousands):

2005........................................................ $ 228
2006........................................................ 163
2007........................................................ 173,678(1)
2008........................................................ 33
2009........................................................ 13
Thereafter.................................................. --
--------
$174,115
========

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

(1) The Company amended its bank credit agreement, effective January 31, 2005,
to extend the maturity to the year 2010.

The Company's capital leases consist primarily of plant facilities and
equipment. The value of capitalized leases and the related accumulated
depreciation totaled $3.1 million and $1.6 million, respectively, at December
31, 2004. The value of capitalized leases and the related accumulated
depreciation totaled $4.3 million and $1.5 million, respectively, at December
31, 2003.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CURRENT DEBT INSTRUMENTS

On October 30, 2003, the Company replaced its existing credit facility with
a $225.0 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. In May 2004, the Company exercised an option to
increase the maximum borrowings under the credit facility to $250 million. The
facility was to mature on October 30, 2007, unless extended for up to one
additional year period with the consent of the lenders. See Note
14 -- Subsequent Events for Information related to an amendment to the credit
facility. 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 1.5% to 2.5%; 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 0.5% to 1.5%, depending upon the ratio of total debt to EBITDA as
defined in the credit facility.

Commitment fees ranging from 0.375% to 0.5% per year are paid on the
undrawn portion of the facility, depending upon our leverage ratio.

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, encumber assets, 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, 2004, we had $172.6 million outstanding under this
facility and an additional $10.8 million of outstanding letters of credit
leaving $66.6 million available to be drawn under the facility.

In conjunction with executing the senior secured revolving credit facility
on October 30, 2003, the Company recognized additional non-cash interest expense
of $1.2 million, after taxes, for the write-off of deferred financing costs
related to its prior credit facility.

On February 26, 2004 the Company renewed its overdraft credit facility
providing for borrowings totaling L2.0 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. No amounts were
outstanding under this facility at December 31, 2004.

6. RETIREMENT PLANS

The Company sponsors a defined contribution plan. Participation in these
plans is available to substantially all employees. The Company recognized
expense of $3.1 million, $2.9 million and $2.5 million, respectively, related to
its various defined contribution plans during the years ended December 31, 2004,
2003 and 2002, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

Consolidated pre-tax income for the years ended December 31, 2004, 2003 and
2002 consisted of the following (in thousands):

The components of the income tax provision for the years ended December 31,
2004, 2003 and 2002 consisted of the following (in thousands):

The provision for taxes differs from an amount computed at statutory rates
as follows for the years ended December 31, 2004, 2003 and 2002 (in thousands):

62

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The significant items giving rise to the deferred tax assets and
liabilities as of December 31, 2004 and 2003 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, 2004 and 2003 are as
follows (in thousands):

Our primary deferred tax asset, which totaled approximately $12.5 million
at December 31, 2004, is related to $35.8 million in available federal net
operating loss carryforwards, or NOLs, as of that date. A valuation allowance of
approximately $5.1 million was provided against the deferred tax asset
associated with our NOLs at December 31, 2004. The NOLs will expire in varying
amounts during the years 2010 through 2020 if they are not first used to offset
taxable income that we generate. Our ability to utilize a significant portion of
the available NOLs is currently limited under Section 382 of the Internal
Revenue Code due to a change of control that occurred during 1995. A successive
change in control was triggered in 2003 pursuant to Section 382; however, it did
not significantly change our NOL utilization expectations.

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Our income tax provision for the year ended December 31, 2004 totaled $29.4
million, or 33.1% of pretax income. The income tax provision for the year 2004
included a $6.9 million income tax benefit related to the partial reversal of
the valuation allowance applied against NOLs which were recorded as of the prior
year end. Based upon positive earnings that we have generated for both financial
and tax reporting purposes since our formation, we believed that we would more
likely than not generate sufficient taxable income in future years to realize
the benefit of all but $5.1 million of the deferred tax asset associated with
these net operating losses. Following the recognition of the $6.9 million income
tax benefit during the year 2004, we have recognized the associated income tax
benefit, on a cumulative basis, of approximately $21.2 million of our $35.8
million of available federal net operating loss carryforwards. The Company has
federal alternative minimum tax net operating loss carryforwards of $18.9
million, which will expire in the years 2010 through 2020.

The Company has $2.9 million of net operating loss carryforwards associated
with its Canadian subsidiary's Chilean operations as of December 31, 2004. These
losses may be carried forward indefinitely; however, such losses may only be
used to offset future Chilean taxable income. Accordingly, the Company has
provided a full valuation allowance against the associated deferred tax asset.

Appropriate U.S. 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 $126.0 million at December 31, 2004. Upon
distribution of these earnings in the form of dividends or otherwise, the
Company may be subject to US income taxes (subject to adjustment for foreign tax
credits) and foreign 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.

During the year ended December 31, 2004, the Company recognized a tax
benefit triggered by employee exercises of stock options totaling $1.1 million.
Such benefit was credited to additional paid-in capital.

In October 2004, the American Jobs Creation Act of 2004 (the "Jobs Act")
was signed into law which introduced a special one-time dividends received
deduction on the repatriation of foreign earnings to a U.S. taxpayer
(repatriation provision), provided certain criteria are met. The Act provides
for a special one-time deduction of 85 percent of certain foreign earnings that
are repatriated in either the Company's last tax year that began before the
enactment date, or the first tax year that begins during the one-year period
beginning on the date of enactment. The maximum amount of the Company's foreign
earnings that qualify for temporary deduction is $69.6 million.

The Company is in the process of evaluating whether it will repatriate
foreign earnings under the repatriation provisions of the Jobs Act, and if so,
the amount that will be repatriated. The range of reasonably possible amounts
that the Company is considering for repatriation, which would be eligible for
the temporary deduction, is zero to $69.6 million. The Company is awaiting the
issuance of further regulatory guidance and passage of statutory technical
corrections with respect to certain provisions in the Jobs Act prior to
determining the amounts it will repatriate, if any. The Company expects to
determine the amounts and sources of foreign earnings to be repatriated, if any,
in 2005.

The Company is not yet in a position to determine the impact of a
qualifying repatriation, should it choose to make one, on its income tax expense
for 2005, the amount of its indefinitely reinvested foreign earnings, the range
of income tax effects or the amount of its deferred tax liability with respect
to foreign earnings.

The Company files tax returns in the jurisdictions in which they are
required. All of these returns are subject to examination or audit and possible
adjustment as a result of assessments by taxing authorities. The Company
believes that it has recorded sufficient tax liabilities and does not expect the
resolution of any

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examination or audit of its tax returns would have a material adverse effect on
its operating results, financial condition or liquidity.

8. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the years ended December 31, 2004, 2003 and 2002 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, 2004, 2003 and 2002
are summarized as follows (in thousands):

In connection with an acquisition made in 2004, the Company had a non-cash
transaction consisting of the issuance of a $4.6 million note payable to a
seller. 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 a capital lease totaling $3.3 million.

In 2002, we acquired the following six businesses for total consideration
of $72.1 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 is 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.

In 2003, we spent $16.8 million, including acquisition costs, to acquire
five businesses. Three of the businesses were rental tool companies acquired for
a total consideration of $10.5 million. The acquired rental tool companies
conduct operations in South Texas and Louisiana and were combined with our
existing rental tool business within our well site services segment. The
remaining two businesses, acquired for aggregate consideration of $6.3 million,
were combined with our offshore products segment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In January 2004, we completed the acquisition of several related rental
tool companies for $34.8 million. The companies, based in South Texas are
leading providers of thru-tubing services and ancillary equipment rentals. These
companies have been combined with our rental tool subsidiary, and report through
the well site services segment. We completed an additional acquisition of a
rental tool company in April 2004 for $4.8 million.

In May 2004, we purchased the oil country tubular goods ("OCTG")
distribution business of Hunting Energy Services, L.P., a wholly-owned affiliate
of Hunting plc, for $47.0 million, including a purchase price adjustment settled
in October 2004. In connection with the transaction, we purchased Hunting's U.S.
tubular inventory, assumed certain customer contracts and entered into supply
and distribution relationships with Hunting for the future. Hunting's
distribution operations were merged into our tubular services segment.

In October 2004, our offshore products segment acquired a small business
for $0.4 million which has become part of our existing elastomers business.

9. 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.

Minimum future operating lease obligations in effect at December 31, 2004,
are as follows (in thousands):

Rental expense under operating leases was $4.5 million, $4.9 million and
$4.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.

As of December 31, 2003, the Company had entered into forward purchase
option contracts through February 25, 2004 with a bank totaling $5.0 million for
the purchase of foreign currency as a hedge to expected future billings. In 2004
we realized a gain of $0.9 million upon settlement of our forward option
purchase contract. No such contracts were outstanding at December 31, 2004.

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 warranty
and product liability claims and 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.

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On February 18, 2005, the Company announced that it had conducted an
internal investigation prompted by the discovery of over billings totaling
$439,000 by one of its subsidiaries (the "Subsidiary") to a government owned oil
company in South America. The over billings were detected by the Company during
routine financial review procedures, and appropriate financial statement
adjustments were included in its previously reported fourth quarter 2004
results. The Company and independent counsel retained by the Company's audit
committee conducted separate investigations consisting of interviews and a
thorough examination of the facts and circumstances in this matter. The Company
has voluntarily reported the results of its investigation to the Securities and
Exchange Commission (the "SEC") and will fully cooperate with any requests for
information received from the SEC.

10. 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."

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 Equity
Participation 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. All option grants made from February 2001
to December 2004 have been priced at the closing price on the day of grant, vest
25% per year and have a life ranging from 6 to 10 years. Because the exercise
price of options granted under the Equity Participation 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 Equity Participation 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, 2004, 2003 and 2002, would have been as follows (in
thousands, except per share amounts):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes stock option activity for each of the three
years ended December 31, 2004:

The following table summarizes information for stock options outstanding at
December 31, 2004:

At December 31, 2004, 1,329,802 shares were available for future grant
under the Stock Option Plan.

The weighted average fair values of options granted during 2004, 2003, and
2002 were $5.18, $4.55, and $5.31 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 2004, 2003, and 2002, respectively: risk-free interest rates of 3.1%,
3.0%, and 5.2%, no expected dividend yield, expected lives of 5.0, 5.5, and 10.0
years, and an expected volatility of 37%, 37% and 45%.

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NOTES TO CONSOLIDATED 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.
Since inception of the Plan, this discretionary contribution provision has been
limited to a matching of the employee participants contribution on a basis
equivalent to matching permitted under the Company's 401(k) Retirement Savings
Plan. 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 pre-approved mutual funds held by the Trust. Prior to November 1,
2003, participants also had the ability to direct the Plan Administrator to
invest the assets in their accounts in Company common stock. In addition,
participants currently have the right to request that the Plan Administrator
re-allocate the portfolio of investments (i.e. cash or mutual funds) in the
participants' individual accounts within the Trust. Current balances invested in
Company common stock may not be further increased. Company contributions are in
the form of cash. 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,
2004, the balance of the assets in the Trust totaled $3.5 million, including
31,028 shares of common stock of the Company reflected as treasury stock at a
value of $0.3 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 nine 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, 2004 was $3.2 million and is
classified as "Other noncurrent assets" in the consolidated balance sheet.
Amounts payable to the plan participants at December 31, 2004, including the
market value of the shares of the Company's common stock that are reflected as
treasury stock, was $3.8 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 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 statements of income. In
response to the changes in total market value of the Company's common stock held
by the Trust, the Company recorded net compensation expense adjustments of $0.2
million in 2004 and $0.1 million in both 2003 and 2002.

11. 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

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

Financial information by industry segment for each of the three years ended
December 31, 2004, 2003 and 2002, is summarized in the following table in
thousands. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Financial information by geographic segment for each of the three years
ended December 31, 2004, 2003 and 2002, 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.

No customers accounted for more than 10% of the Company's revenues in any
of the years ended December 31, 2004, 2003 and 2002.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table summarizes quarterly financial information for 2004,
2003 and 2002 (in thousands, except per share amounts):

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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. VALUATION ALLOWANCES

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

14. SUBSEQUENT EVENTS

In February 2005, the Company completed the acquisition of Elenburg
Exploration Company, Inc. (Elenburg) for total consideration of $22.0 million.
The cash portion of the purchase price ($21.3 million) was funded by the
Company's existing credit lines. Elenburg, which is a Wyoming based land
drilling company, will become part of our well site services segment. Elenburg
owns seven drilling rigs that operate primarily in Montana, Wyoming, Colorado
and Utah.

On January 31, 2005, the Company amended its existing revolving credit
facility with its current group of lenders. Under terms of the amendment, Oil
States increased the facility to $325 million from $250 million and extended the
term of the facility through January 2010. The amendment also adjusted several
covenants and lowered borrowing rates across the pricing grid.

The Company's Board of Directors has authorized the repurchase of shares of
the Company's common stock, par value $.01 per share. The Board of Directors
authorized the expenditure of up to $50 million to repurchase shares.

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INDEX TO EXHIBITS

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

* Filed herewith

** Management contracts or compensatory plans or arrangements

*** Furnished herewith.