NATIONAL OILWELL INC - 10-K Annual Report

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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2002
OR

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

Commission file number 1-12317

NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0475815
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

10000 RICHMOND AVENUE
HOUSTON, TEXAS
77042-4200
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(Address of principal executive offices)

(713) 346-7500
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(Registrant's telephone number, including area code)

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

COMMON STOCK, PAR VALUE $.01 NEW YORK STOCK EXCHANGE
---------------------------- ------------------------------
(Title of Class) (Exchange on which registered)

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. [ v ]

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

As of March 3, 2003, 84,224,527 common shares were outstanding. Based upon the
closing price of these shares on the New York Stock Exchange and, excluding
solely for purposes of this calculation 4,140,609 shares beneficially owned by
directors and executive officers, the aggregate market value of the common
shares of National-Oilwell, Inc. held by non-affiliates was approximately $1.8
billion.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement in connection with the 2003 Annual Meeting of
Stockholders are incorporated in Part III of this report.

ITEM 1. BUSINESS

GENERAL

National Oilwell is a worldwide leader in the design, manufacture and sale of
comprehensive systems, components, and products used in oil and gas drilling and
production, as well as in distributing products and providing supply chain
integration services to the upstream oil and gas industry.

Our Products and Technology segment is a global leader in the design and
manufacture of complete land drilling and workover rigs, and for drilling
related systems on offshore rigs. Technology has increased the desirability of
one vendor assuming responsibility for the entire suite of components used in
the drilling process, as mechanical and hydraulic components are replaced by or
augmented with integrated computerized systems. In addition to traditional
components such as drawworks, mud pumps, top drives, derricks, cranes, jacking
and mooring systems, and other structural components, we provide automated
pipehandling, control and electrical power systems. We have also developed new
technology for drawworks and mud pumps applicable to the highly demanding
offshore markets.

Non-capital products produced by our Products and Technology segment include
drilling motors and specialized downhole tools that are sold or rented, spare
parts and service on the large installed base of our equipment, expendable parts
for mud pumps and other equipment, and smaller downhole, progressive cavity and
transfer pumps.

Our Distribution Services segment provides maintenance, repair and operating
supplies and spare parts to drill site and production locations throughout North
America and to offshore contractors worldwide. Increasingly, this business also
is expanding to locations outside North America, including the Middle East,
Southeast Asia, and South America. Using our information technology platforms
and processes, we can provide complete procurement, inventory management, and
logistics services to our customers.

BUSINESS STRATEGY

National Oilwell's business strategy is to enhance its market positions and
operating performance in the upstream oil and gas business by:

Leveraging our Capital Equipment Installed Base

We believe our market position and comprehensive product offering present
substantial opportunities to capture a significant portion of expenditures for
the construction of new drilling rigs and equipment as well as the upgrade and
refurbishment of existing drilling rigs and equipment. Over the next few years,
the advanced age of the existing fleet of drilling rigs, coupled with drilling
activity involving greater depths and extended reach, is expected to generate
demand for new equipment. National Oilwell's automation and control systems
offer the potential to improve the performance of new and existing drilling
rigs. The large installed base of our equipment also provides recurring demand
for spare parts and expendable products necessary for proper and efficient
operation.

Expanding our Non-Capital Products Business

Our non-capital equipment revenues continue to represent over half of our
products and technology business. We are a leader in the rental and sale of
high-performance drilling motors and downhole tools and in the manufacture of
certain expendable products and spare parts needed in the drilling and
production process. We believe additional expansion in the non-capital upstream
oil and gas industry would be beneficial to our business and our customers.

1

Furthering our Information Technology and Process Improvement Strategy

National Oilwell has developed an integrated information technology and process
improvement strategy to enhance procurement, inventory management and logistics
activities. As a result of the need to improve industry efficiency, oil and gas
companies and drilling contractors are frequently seeking alliances with
suppliers, manufacturers and service providers to achieve cost and capital
improvements. We believe we are well positioned to provide these services as a
result of our:

- large and geographically diverse network of distribution service
centers in major oil and gas producing areas;

- strong relationship with a large community of industry suppliers;

- knowledge of customers procurement processes, suppliers capabilities
and products performance; and

- information systems that offer customers and suppliers enhanced
capabilities.

In addition, the integration of our distribution expertise, extensive network
and growing base of customer alliances provides an increased opportunity for
cost-effective marketing of our manufactured parts and equipment.

Continuing our Acquisitions Strategy

We believe the oilfield service and equipment industry will continue to
experience consolidation as businesses seek to align themselves with other
market participants in order to gain access to broader markets and integrated
product offerings. From 1997 through January 2003, National Oilwell has made a
total of thirty-two acquisitions and plans to continue to participate in this
trend.

OPERATIONS

Products and Technology

National Oilwell designs, manufactures and sells drilling systems and components
for both land and offshore drilling rigs as well as complete land drilling and
well servicing rigs. Mechanical components include drawworks, mud pumps, top
drives, solids control equipment, traveling equipment and rotary tables. These
components are essential to pump fluids and hoist, support and rotate the drill
string. Many of these components are designed specifically for applications in
offshore, extended reach and deep land drilling. This equipment is installed on
new rigs and often replaced during the upgrade and refurbishment of existing
rigs.

We design and manufacture masts, derricks and substructures for use on land rigs
and on fixed and mobile offshore platforms suitable for drilling applications to
depths of up to 30,000 feet or more. Other products include cranes, jacking
systems, mooring systems, reciprocating and centrifugal pumps and fluid end
expendables for all major manufacturers' pumps. Our business includes the sale
of replacement parts for our own manufactured machinery and equipment.

We also design and manufacture electrical systems and control and data
acquisition systems for drilling related operations and automated and remotely
controlled machinery for drilling rigs. Our control systems can control and
monitor many simultaneous operations on a drilling rig and often form the basis
for our state-of-the-art driller's cabin. Our automated pipe handling system
provides an efficient and cost effective method of joining lengths of drill pipe
or casing as does our iron roughneck. These and similar technologically advanced
products can greatly improve the safety on rigs, often by reducing the number of
persons working on the drilling floor.

2

While offering a complete line of conventional rigs, National Oilwell has
extensive experience in providing rig designs to satisfy requirements for harsh
or specialized environments. Such products include drilling and well servicing
rigs designed for the Arctic, highly mobile drilling and well servicing rigs for
jungle and desert use, modular well servicing rigs for offshore platforms and
modular drilling facilities for North Sea platforms. We also design and produce
fully integrated drilling solutions for offshore rigs.

National Oilwell designs and manufactures drilling motors, drilling jars and
specialized drilling tools for rent and sale. We also design and manufacture a
complete line of fishing tools used to remove objects stuck in the wellbore.

Distribution Services

National Oilwell provides distribution services through its network of
approximately 150 distribution service centers. These distribution service
centers stock and sell a variety of expendable items for oilfield applications
and spare parts for our proprietary equipment. As oil and gas companies and
drilling contractors have refocused on their core competencies and emphasized
efficiency initiatives to reduce costs and capital requirements, our
distribution services have expanded to offer outsourcing and alliance
arrangements that include comprehensive procurement, inventory management and
logistics support. In addition, we believe we have a competitive advantage in
the distribution services business by distributing market-leading products
manufactured by us and from the association of this business with our Products
and Technology segment.

The supplies and equipment stocked by our distribution service centers vary by
location. Each distribution point generally offers a large line of oilfield
products including valves, fittings, flanges, spare parts for oilfield equipment
and miscellaneous expendable items.

Most drilling contractors and oil and gas companies typically buy supplies and
equipment pursuant to non-exclusive contracts, which normally specify a discount
from list price for each product or product category. Our goal is to create
strategic alliances with our customers whereby we become the customer's primary
supplier of those items. In certain cases, we assume responsibility for
procurement, inventory management and product delivery for the customer,
occasionally by working directly out of the customer's facilities.

We believe e-commerce brings a significant advantage to larger companies that
are technologically proficient. During the last few years, we have invested over
$20 million to improve our information technology systems. Our e-commerce system
can interface directly with customers' systems to maximize efficiencies for us
and for our customers. We believe we have an advantage in this effort due to our
investment in technology, geographic size, knowledge of the industry and
customers, existing relationships with vendors and existing means of product
delivery.

Marketing

Substantially all of our capital equipment and spare parts sales, and a large
portion of our smaller pumps and parts sales, are made through our direct sales
force and distribution service centers. Sales to foreign state-owned oil
companies are typically made in conjunction with agent or representative
arrangements. Our downhole products are generally rented and sold worldwide
through our own sales force and through commissioned representatives.
Distribution sales are made through our network of distribution service centers.
Customers for our products and services include drilling and other service
contractors, exploration and production companies, supply companies and
nationally owned or controlled drilling and production companies.

Competition

The oilfield services and equipment industry is highly competitive and our
revenues and earnings can be affected by price changes, introduction of new
technologies and products and improved availability and delivery. We compete
with a large number of companies, none of which are dominant.

3

Manufacturing and Backlog

National Oilwell has manufacturing facilities located in the United States,
Canada, Norway and China. The manufacture of parts or purchase of components is
sometimes outsourced to qualified subcontractors. The manufacturing operations
require a variety of components, parts and raw materials which we purchase from
multiple commercial sources. We have not experienced and do not expect any
significant delays in obtaining deliveries of materials.

Sales of products are made on the basis of written orders and oral commitments.
Our backlog for equipment at recent year-ends has been:

December 31, 2002 $364 million (includes $170 million from the Hydralift ASA acquisition)
December 31, 2001 385 million
December 31, 2000 282 million

Distribution Suppliers

National Oilwell obtains products sold by its Distribution Services business
from a number of suppliers, including our own Products and Technology segment.
No single supplier of products is significant to our operations. We have not
experienced and do not expect a shortage of products that we sell.

Engineering

National Oilwell maintains a staff of engineers and technicians to:

- design and test new products, components and systems for use in drilling
and pumping applications;

- enhance the capabilities of existing products; and

- assist our sales organization and customers with special projects.

Our product engineering efforts focus on developing technology to improve the
economics and safety of drilling and production processes, and to emphasize
technology and complete drilling solutions.

Patents and Trademarks

National Oilwell owns or has a license to use a number of patents covering a
variety of products. Although in the aggregate these patents are of importance,
we do not consider any single patent to be of a critical or essential nature. In
general, our business has historically relied upon technological capabilities,
quality products and application of expertise rather than patented technology.

Employees

As of December 31, 2002, we had a total of 6,900 employees, 4,300 of whom were
salaried and 2,600 of whom were paid on an hourly basis. Of this workforce,
1,300 employees are employed in Canada, 850 in Norway and 675 in other locations
outside the United States.

Available Information Regarding our SEC Filings

Our corporate offices are located at 10000 Richmond Avenue, Houston, Texas
77042-4200. Our phone number at that location is (713) 346-7500 and our Internet
address is www.natoil.com. Information we make public about our company,
including all SEC required filings, is available to you, free of charge, at our
Internet address.

4

RISK FACTORS

You should carefully consider the risks described below, in addition to other
information contained or incorporated by reference herein. Realization of any of
the following risks could have a material adverse effect on our business,
financial condition, cash flows and results of operations.

National Oilwell Depends on the Oil and Gas Industry

National Oilwell is dependent upon the oil and gas industry and its willingness
to explore for and produce oil and gas. The industry's willingness to explore
and produce depends upon the prevailing view of future product prices. Many
factors affect the supply and demand for oil and gas and therefore influence
product prices, including:

o level of production from known reserves;
o cost of producing oil and gas;
o level of drilling activity;
o worldwide economic activity;
o national government political requirements;
o development of alternate energy sources; and
o environmental regulations.

If there is a significant reduction in demand for drilling services, in cash
flows of drilling contractors or production companies or in drilling or well
servicing rig utilization rates, then demand for our products will decline.

Oil and Gas Prices are Volatile

Oil and gas prices have been volatile since 1990, ranging from $10 - $40 per
barrel. Over the last three years, oil prices have generally ranged within $20 -
$30 per barrel. Spot gas prices have also been volatile since 1990, ranging from
less than $1.00 per mmbtu to above $10.00. Gas prices were moderate in 1998 and
1999, generally ranging from $1.80 to $2.50 per mmbtu. Gas prices in 2000
generally ranged from $4.00 - $8.00 per mmbtu. In the second quarter of 2001,
gas prices came under pressure, generally ranging between $2.20 to $3.00 per
mmbtu through the first quarter of 2002. Gas prices have generally ranged
between $3.00 - $5.00 per mmbtu since that time.

Expectations for future oil and gas prices cause many shifts in the strategies
and expenditure levels of oil and gas companies and drilling contractors,
particularly with respect to decisions to purchase major capital equipment of
the type we manufacture. Industry activity and our revenues have not responded
to the higher commodity prices that have existed since the second quarter of
2002, presumably due to concerns that these prices will not continue in the
current range. We cannot predict future oil and gas prices or the effect prices
will have on exploration and production levels.

National Oilwell's Industry is Highly Competitive

The oilfield products and services industry is highly competitive. The following
competitive actions can each affect our revenues and earnings:

o price changes;
o new product and technology introductions; and
o improvements in availability and delivery.

We compete with many companies and there are low barriers to entry in many of
our business segments.

5

National Oilwell Faces Potential Product Liability and Warranty Claims

Customers use some of our products in potentially hazardous drilling, completion
and production applications that can cause:

o injury or loss of life;
o damage to property, equipment or the environment; and
o suspension of operations.

We maintain amounts and types of insurance coverage that we believe are
consistent with normal industry practice. We cannot guarantee that insurance
will be adequate to cover all liabilities we may incur. We also may not be able
to maintain insurance in the future at levels we believe are necessary and at
rates we consider reasonable.

National Oilwell may be named as a defendant in product liability or other
lawsuits asserting potentially large claims if an accident occurs at a location
where our equipment and services have been used. We are currently party to
various legal and administrative proceedings. We cannot predict the outcome of
these proceedings, nor can we guarantee any negative outcomes will not be
significant to us.

Instability of Foreign Markets Could Have a Negative Impact on our Revenues and
Operating Results

Some of our revenues depend upon customers in the Middle East, Africa, Southeast
Asia, South America and other international markets. These revenues are subject
to risks of instability of foreign economies and governments. Laws and
regulations limiting exports to particular countries can affect our sales, and
sometimes export laws and regulations of one jurisdiction contradict those of
another.

Changes in Foreign Currency Exchange Rates Could Have a Negative Impact on our
Revenues and Operating Results

National Oilwell is exposed to the risks of changes in exchange rates between
the U.S. dollar and foreign currencies. Our Norwegian companies enter into
foreign exchange forward contracts, primarily between the Norwegian kroner and
the US dollar, to hedge cash flows on certain significant contracts. Our
decisions regarding the need for hedging foreign currencies in Norway and other
countries can adversely affect our operating results.

National Oilwell May Not be Able to Successfully Manage its Growth

National Oilwell has acquired 32 companies since April 1997, including nine in
2001 and four in 2002. In addition, we acquired two other companies in January
2003. We cannot predict whether suitable acquisition candidates will be
available on reasonable terms or if we will have access to adequate funds to
complete any desired acquisition. Once acquired, we cannot guarantee that we
will successfully integrate the operations of the acquired companies. Combining
organizations could interrupt the activities of some or all of our businesses
and have a negative impact on operations.

National Oilwell has Debt

In 1998, National Oilwell issued $150 million of 6 7/8% unsecured senior notes
due July 1, 2005. In 2001, we issued an additional $150 million of 6 1/2%
unsecured senior notes due March 15, 2011. In 2002, we issued $200 million of
5.65% unsecured senior notes due November 15, 2012. We also have a $175 million
revolving line of credit and approximately $223 million in facilities, of which
$91 million was available at December 31, 2002, under various borrowing
arrangements of our wholly-owned foreign subsidiaries. Our leverage requires us
to use some of our cash flow from operations for payment of interest on our
debt. Our leverage may also make it more difficult to obtain additional
financing in the future. Further, our leverage could make us more vulnerable to
economic downturns and competitive pressures.

6

Item 2. Properties

National Oilwell owned or leased approximately 235 facilities worldwide as of
December 31, 2002, including the following principal manufacturing and
administrative facilities:

We own or lease 65 satellite repair and manufacturing facilities that refurbish
and manufacture new equipment and parts and approximately 150 distribution
service centers worldwide. We believe the capacity of our facilities is adequate
to meet demand currently anticipated for 2003.

ITEM 3. LEGAL PROCEEDINGS

National Oilwell has various claims, lawsuits and administrative proceedings
that are pending or threatened, all arising in the ordinary course of business,
with respect to commercial, product liability and employee matters. Although no
assurance can be given with respect to the outcome of these or any other pending
legal and administrative proceedings and the effect such outcomes may have, we
believe any ultimate liability resulting from the outcome of such proceedings
will not have a material adverse effect on our consolidated financial
statements.

7

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

No matters were submitted to a vote of security holders during the quarter ended
December 31, 2002.

PART II

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

Market Information

National Oilwell common stock is listed on the New York Stock Exchange (ticker
symbol: NOI). The following table sets forth the stock price range during the
past three years:

As of March 3, 2003, there were 537 holders of record of National Oilwell common
stock. Many stockholders choose to own shares through brokerage accounts and
other intermediaries rather than as holders of record so the actual number is
unknown but significantly higher. National Oilwell has never paid cash
dividends, and none are anticipated during 2003.

8

ITEM 6. SELECTED FINANCIAL DATA

Data for periods prior to 2000 shown below is restated to combine IRI
International and Dupre' results pursuant to pooling-of-interests accounting.

(1) In connection with the IRI International Corporation merger in 2000, we
recorded charges of $14.1 million related to direct merger costs, personnel
reductions, and facility closures and inventory write-offs of $15.7 million
due to product line rationalization. In 1998, a $17.0 million charge was
recorded related to personnel reductions and facility closures and a $5.6
million charge related to the write-down of certain tubular inventories.

(2) We adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142), effective January 1, 2002. The
effects of not amortizing goodwill and other intangible assets in periods
prior to the adoption of SFAS 142 would have resulted in net income (loss)
of $115.0 million, $23.1 million, $(4.0) million and $84.8 million for the
years ended December 31, 2001, 2000, 1999,and 1998, respectively; basic
earnings per common share of $1.42, $0.29, $(0.06) and $1.24 for the years
ending December 31, 2001, 2000, 1999 and 1998, respectively; and diluted
earnings per common share of $1.41, $0.29, $(0.06) and $1.24 for the years
ending December 31, 2001, 2000, 1999 and 1998, respectively.

9

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

INTRODUCTION

National Oilwell is a worldwide leader in the design, manufacture and sale of
drilling systems, drilling equipment and downhole products as well as the
distribution to the oil and gas industry of maintenance, repair and operating
products. Our revenues and operating results are directly related to the level
of worldwide oil and gas drilling and production activities and the
profitability and cash flow of oil and gas companies and drilling contractors,
which in turn are affected by current and anticipated prices of oil and gas. Oil
and gas prices have been and are likely to continue to be volatile. See "Risk
Factors".

We conduct our operations through the following segments:

Products and Technology

Our Products and Technology segment is a global leader in the design and
manufacture of complete land drilling and workover rigs, and for drilling
related systems on offshore rigs. Technology has increased the desirability of
one vendor assuming responsibility for the entire suite of components used in
the drilling process, as mechanical and hydraulic components are replaced by or
augmented with integrated computerized systems. In addition to traditional
components such as drawworks, mud pumps, top drives, derricks, cranes, jacking
and mooring systems, and other structural components, we provide automated
pipehandling, control and electrical power systems. We have also developed new
technology for drawworks and mud pumps applicable to the highly demanding
offshore markets.

Distribution Services

Our Distribution Services segment provides maintenance, repair and operating
supplies and spare parts from our network of distribution service centers to
drill site and production locations throughout North America and to offshore
contractors worldwide. Increasingly, this business also is expanding to
locations outside North America, including the Middle East, Southeast Asia, and
South America. Using our information technology platforms and processes, we can
provide complete procurement, inventory management, and logistics services to
our customers. Products are purchased from numerous manufacturers and vendors,
including our Products and Technology segment.

RESULTS OF OPERATIONS

Operating results by segment, which have been restated to reflect a business
combination accounted for under the pooling-of-interests method during 2000, are
as follows (in millions):

10

Products and Technology

Products and Technology revenues in 2002 were $203.6 million (18%) lower than
the previous year as moderate oil and gas prices failed to sustain the 2001
levels of market activity in all product areas. Capital equipment revenues were
down $72 million while related spare parts and expendable parts were lower than
2001 by $38 million. Sales and rentals of downhole motors and fishing tools
decreased by approximately $74 million, impacted by its strong dependence on the
North American market. Operating income fell $44 million in 2002 when compared
to the prior year, impacted by the margin reduction due to the significantly
lower volume. The absence of amortization of goodwill in 2002, as required per
the new accounting guidance, favorably impacted operating income by $10.4
million. Reductions in compensation expense also contributed approximately $11.0
million in operating income when compared to the prior year. Revenues from the
mid-December 2002 acquisition of Hydralift ASA, and the consolidation of our
Chinese joint venture, each contributed $8.0 million in revenues and $0.3
million and $2.2 million in operating income, respectively.

Revenues for the Products and Technology segment in 2001 increased by $437.4
million (64 %) from 2000 as virtually all products experienced significant
revenue growth. Capital equipment revenues were up $285 million, drilling spares
up $35 million, expendable pumps and parts were higher by $47 million and
downhole tools increased $75 million. As a result of this robust revenue growth,
operating income in 2001 increased by $110.0 million from the prior year.
Revenues from acquisitions completed in 2001 under the purchase method of
accounting contributed $34 million in incremental revenues.

Backlog of the Products and Technology capital products was $364 million at
December 31, 2002, $385 million at December 31, 2001 and $282 million at
December 31, 2000. Backlog at December 31, 2002 includes $170 million acquired
in late December through the purchase of Hydralift ASA. Substantially all of the
current backlog is expected to be shipped by mid-year 2004.

Distribution Services

Distribution Services revenues fell $21.6 million, or 3%, from the 2001 level as
this segment's strategy to create strategic alliances and expand its
international presence made significant market penetration during a difficult
market. North American revenues fell approximately 16% due to the lower activity
level while shipments in the international market almost doubled. Sales of our
own-make products increased almost 12% while maintenance, repair and operating
("MRO") supplies fell almost 5%. Operating income in 2002 was $10.4 million
lower than the prior year. Margin reduction, due to the lower volume and project
bidding pressures, contributed to approximately 80% of the operating income
shortfall with the remainder due to significant infrastructure growth.

Distribution Services revenues in 2001 increased $186.5 million from the 2000
level with all areas and products participating in the upswing that lasted until
the middle of the 4th quarter 2001. U.S. revenues of MRO supplies were up 44%
while Canadian revenues were 13% higher than the prior year. Operating income in
2001 increased by $15.6 million from the prior year due to the higher revenue
volume and cost efficiencies linked to the new global operating system. Revenues
from acquisitions completed in 2001 under the purchase method of accounting
contributed $24 million in incremental revenues.

Corporate

Corporate charges represent the unallocated portion of centralized and executive
management costs. Year 2002 costs of $10.8 million reflect certain corporate-led
marketing initiatives and general overhead incurred to support a larger company.
Year 2001 costs of $10.2 million represents a 10% reduction from the prior year
as various e-strategy and e-commerce initiatives became operational. Year 2003
corporate charges are expected to approximate $12 million due to recent
acquisitions.

11

Special Charge
During 2000, we recorded a special charge, net of a $0.4 million credit from
previous special charges, of $14.1 million ($11.0 million after tax, or $0.14
per share) related to the merger with IRI International. Components of the
charge were (in millions):

Direct transaction costs $ 6.6
Severance 6.4
Facility closures 1.5
-----
14.5
Prior year reversal (0.4)
-----
$14.1
-----

The cash and non-cash elements of the charge approximated $13 million and $1.1
million, respectively. All direct cash outlays have been spent. Facility closure
costs consisted of lease cancellation costs and impairment of a closed
manufacturing facility that is classified with "Property held for sale" on our
balance sheet. All of this charge is applicable to the Products and Technology
business segment.

Interest Expense
Interest expense in 2002 totaled $24.1 million, an increase of $1.3 million from
the prior year. All of this increase is a direct result of our mid-November 2002
sale of $200 million of 5.65% unsecured senior notes. Our average borrowing cost
during 2002 of 6.4% remained the same as 2001. We expect our interest expense in
2003 to increase by at least $10 million as a result of our higher senior debt
level.

Despite continual borrowing rate declines during 2001, interest expense
increased approximately $5.5 million over 2000 due to our higher debt level to
support the working capital associated with the robust business climate. In
March 2001, we sold $150 million of 6 1/2% unsecured senior notes which
increased our total senior debt to $300 million. Year 2001 average monthly debt,
including the senior notes, was $334 million or $118 million (54%) greater than
the 2000 level.

Income Taxes

National Oilwell is subject to U.S. federal, state and foreign taxes and
recorded a combined tax rate of 35% in 2002, 38% in 2001 and 51% in 2000. The
2000 effective tax rate was impacted by certain transaction costs associated
with the IRI merger and the inclusion of pre-merger IRI capital losses due to
pooling-of-interests accounting that may not be deductible. Excluding the impact
of merger-related costs and capital losses, our combined effective tax rate for
2000 was 36%. We expect our tax rate in 2003 to approximate 34%.

We have net operating loss carryforwards in the United States that could reduce
future tax expense by up to $4.2 million. They expire at various dates through
2017. Additional loss carryforwards in Europe could reduce future tax expense by
$10.3 million and reduce goodwill $9.4 million if realized in the future. Due to
the uncertainty of future utilization of these loss carryforwards, $2.8 million
of the potential benefits in the U.S. and $9.6 million in Europe have been fully
reserved.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2002, National Oilwell had working capital of $768.9 million, an
increase of $137.6 million from December 31, 2001. The addition of Hydralift ASA
and consolidation of the Chinese joint venture accounted for $123.3 million of
this increase, including $78 million of the increase in cash. After considering
the Halco acquisition in January 2002 and the change in current deferred taxes,
the rest of the company reduced our need for working capital during 2002. Due to
a new revolving three-year credit facility put in place during July 2002, all of
our debt is of a long-term nature.

12

Total capital expenditures were $24.8 million during 2002, $27.4 million in 2001
and $24.6 million in 2000. Additions and enhancements to the downhole rental
tool fleet and information management and inventory control systems represent
the majority of these capital expenditures. Capital expenditures are expected to
approximate $35 million in 2003, which should also approximate depreciation
expense in that year, with continued emphasis on rental tools and information
technology. We believe we have sufficient existing manufacturing capacity to
meet currently anticipated demand through 2003 for our products and services.

In November 2002, we sold $200 million of 5.65 % unsecured senior notes due
November 15, 2012. Proceeds were used to acquire Hydralift ASA. Interest is
payable on May 15 and November 15 of each year. In March 2001, we sold $150
million of 6.50 % unsecured senior notes due March 15, 2011, with interest
payable on March 15 and September 15 of each year. In June 1998, we sold $150
million of 6.875 % unsecured senior notes due July 1, 2005, with interest
payments due annually on January 1 and July 1.

On July 30, 2002, we replaced the existing credit facility with a new three-year
unsecured $175 million revolving credit facility. This facility is available for
acquisitions and general corporate purposes and provides up to $50 million for
letters of credit, of which $22.0 million were outstanding at December 31, 2002.
Interest is based upon prime or Libor plus 0.5% subject to a ratings based grid.
In securing this new credit facility, we incurred approximately $0.9 million in
fees which will be amortized to expense over the term of the facility.

The senior notes contain reporting covenants and the credit facility contains
financial covenants and ratios regarding maximum debt to capital and minimum
interest coverage. We were in compliance with all covenants governing these
facilities at December 31, 2002.

We also have additional credit facilities totaling $223 million that are used
primarily for acquisitions, general corporate purposes and letters of credit.
Recently acquired Hydralift ASA represents $152 million of these facilities.
These multi-currency Hydralift committed facilities are secured by a guarantee,
contain financial covenants and expire in 2006. Borrowings against these
additional credit facilities totaled $93 million at December 31, 2002 and an
additional $39 million had been used for letters of credit and guarantees.

We believe cash generated from operations and amounts available under our credit
facilities and from other sources of debt will be sufficient to fund operations,
working capital needs, capital expenditure requirements and financing
obligations. We also believe any significant increase in capital expenditures
caused by any need to increase manufacturing capacity can be funded from
operations or through debt financing.

We have not entered into any transactions, arrangements, or relationships with
unconsolidated entities or other persons which would materially affect
liquidity, or the availability of or requirements for capital resources. A
summary of our outstanding contractual obligations and other commercial
commitments at December 31, 2002 is as follows (in thousands):

13

We intend to pursue additional acquisition candidates, but the timing, size or
success of any acquisition effort and the related potential capital commitments
cannot be predicted. We expect to fund future cash acquisitions primarily with
cash flow from operations and borrowings, including the unborrowed portion of
the credit facility or new debt issuances, but may also issue additional equity
either directly or in connection with acquisitions. There can be no assurance
that acquisition funds will be available at terms acceptable to us.

Inflation has not had a significant impact on National Oilwell's operating
results or financial condition in recent years.

MARKET RISK DISCLOSURE

We are exposed to changes in foreign currency exchange rates and interest rates.
Additional information concerning each of these matters follows:

Foreign Currency Exchange Rates

We have operations in foreign countries, including Canada, Norway and the United
Kingdom, as well as operations in Latin America, China and other European
countries. The net assets and liabilities of these operations are exposed to
changes in foreign currency exchange rates, although such fluctuations generally
do not affect income since their functional currency is the local currency. For
operations where our functional currency is not the local currency, such as
Singapore and Venezuela, the net asset or liability position is insignificant
and, therefore, changes in foreign currency exchange rates are not expected to
have a material impact on earnings.

Some of our revenues in foreign countries are denominated in US dollars, and
therefore, changes in foreign currency exchange rates impact our earnings to the
extent that costs associated with those US dollar revenues are denominated in
the local currency. In order to mitigate that risk, we may utilize foreign
currency forward contracts to better match the currency of our revenues and
associated costs. We do not use foreign currency forward contracts for trading
or speculative purposes. The counterparties to these contracts are major
financial institutions, which minimizes counterparty credit risk.

The impact of foreign currency exchange rates has not materially affected our
results of operations in any of the last three years. We do not believe that a
hypothetical 10% movement in these foreign currencies would have a material
impact on our earnings.

14

Interest Rate Risk

Our long term borrowings consist of $150 million in 6.875% senior notes, $150
million in 6.5% senior notes and $200 million in 5.65% senior notes. We also
have borrowings under our other facilities totaling $94.6 million at December
31, 2002. A portion of the borrowings are denominated in multiple currencies
which could expose us to market risk with exchange rate movements. These
instruments carry interest at a pre-agreed upon percentage point spread from
either the prime interest rate, LIBOR or NIBOR. Under our credit facilities, we
may, at our option, fix the interest rate for certain borrowings based on a
spread over LIBOR or NIBOR for 30 days to 6 months. Based upon our December 31,
2002 borrowings under our variable rate facilities of $94.6 million, an
immediate change of one percent in the interest rate would cause a change in
annual interest expense of approximately $0.9 million. Our objective in
maintaining a portion of our debt in variable rate borrowings is the flexibility
obtained regarding early repayment without penalties and lower overall cost as
compared with fixed-rate borrowings.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements requires us to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Our estimation process generally relates to
potential bad debts, obsolete and slow moving inventory, value of intangible
assets, and deferred income tax accounting. Note 1 to the consolidated financial
statements contains the accounting policies governing each of these matters. Our
estimates are based on historical experience and on our future expectations that
we believe to be reasonable under the circumstances. The combination of these
factors result in the amounts shown as carrying values of assets and liabilities
in the financial statements and accompanying notes. Actual results could differ
from our current estimates and those differences may be material.

We believe the following accounting policies are the most critical in the
preparation of our consolidated financial statements:

We maintain an allowance for doubtful accounts for accounts receivables by
providing for specifically identified accounts where collectibility is doubtful
and a general allowance based on the aging of the receivables compared to past
experience and current trends. A majority of our revenues come from drilling
contractors, independent oil companies, international oil companies and
government-owned or government-controlled oil companies, and we have
receivables, some denominated in local currency, in many foreign countries. If,
due to changes in worldwide oil and gas drilling activity or changes in economic
conditions in certain foreign countries, our customers were unable to repay
these receivables, additional allowances would be required.

Allowances for inventory obsolescence are determined based on our historical
usage of inventory on-hand as well as our future expectations related to our
substantial installed base and the development of new products. The amount
reserved is the recorded cost of the inventory minus its estimated realizable
value. Changes in worldwide oil and gas drilling activity and the development of
new technologies associated with the drilling industry could require additional
allowances to reduce the value of inventory to the lower of its cost or net
realizable value.

Business acquisitions are accounted for using the purchase method of accounting.
The cost of the acquired company is allocated to identifiable tangible and
intangible assets based on estimated fair value, with the excess allocated to
goodwill. On at least an annual basis, we assess whether goodwill is impaired.
Our annual impairment tests are performed at the beginning of the 4th quarter of
each year. If we determine that goodwill is impaired, we measure that impairment
based on the amount by which the book value of goodwill exceeds its implied fair
value. The implied fair value of goodwill is determined by deducting the fair
value of a reporting unit's identifiable assets and liabilities from the fair
value of that reporting unit as a whole. Additional impairment assessments may
be performed on an interim basis if we encounter events or changes in
circumstances that would indicate that, more likely than not, the carrying
amount of goodwill has been impaired. The fair value of the reporting units is
determined based on internal management estimates that considers multiple
valuation techniques.

Our net deferred tax assets and liabilities are recorded at the amount that is
more likely than not to be realized or paid. Should we determine that we would
not be able to realize all or part of the net deferred tax asset in the future,
an adjustment to the deferred tax assets would be charged to income in the
period of such determination.

15

SUBSEQUENT EVENTS

On January 2, 2003, we acquired LSI, a Houston, Texas based distributor of
specialty electrical products, for approximately $13 million. This transaction
generated approximately $6 million in goodwill and is complementary to our
distribution services business.

On January 16, 2003, we acquired the Mono pumping products business from
Halliburton Energy Services for approximately $89 million, consisting of $22.7
million in cash and 3.2 million shares of our common stock. This transaction,
which consisted of purchasing all the outstanding stock of Monoflo, Inc. in the
United States and Mono Group in the United Kingdom, generated approximately $46
million in goodwill and will add to the non-capital product lines within our
Products and Technology segment.

RECENTLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board issued Statement on Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations", which sets forth the accounting and reporting to be followed for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", addresses disposal activities and
termination costs in exiting an activity. These pronouncements are generally
effective January 1, 2003. The Company believes the adoption of these new
accounting pronouncements will not have a significant impact on its results of
operations or financial position.

FORWARD-LOOKING STATEMENTS

Some of the information in this document contains, or has incorporated by
reference, forward-looking statements. Statements that are not historical facts,
including statements about our beliefs and expectations, are forward-looking
statements. Forward-looking statements typically are identified by use of terms
such as "may," "will," "expect," "anticipate," "estimate," and similar words,
although some forward-looking statements are expressed differently. You should
be aware that our actual results could differ materially from results
anticipated in the forward-looking statements due to a number of factors,
including but not limited to changes in oil and gas prices, customer demand for
our products and worldwide economic activity. You should also consider carefully
the statements under "Risk Factors" which address additional factors that could
cause our actual results to differ from those set forth in the forward-looking
statements. Given these uncertainties, current or prospective investors are
cautioned not to place undue reliance on any such forward-looking statements. We
undertake no obligation to update any such factors or forward-looking statements
to reflect future events or developments.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incorporated by reference to Item 7 above, "Market Risk
Disclosure."

ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA

Attached hereto and a part of this report are financial statements
and supplementary data listed in Item 15.

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

None.

16

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference to the definitive Proxy Statement for the
2003 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference to the definitive Proxy Statement for the
2003 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference to the definitive Proxy Statement for the
2003 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to the definitive Proxy Statement for the
2003 Annual Meeting of Stockholders

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our chief executive officer and chief financial officer, based
on their evaluation of our disclosure controls and procedures
(as defined in Exchange Act Rule 13a-14(c)) as of a date
within 90 days prior to the filing of this annual report on
Form 10-K, have concluded that our disclosure controls and
procedures are adequate and effective for the information
required to be disclosed by us in the reports we file or
submit under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and that this information is recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules
and forms.

(b) Changes in internal control

There were no significant changes in our internal controls or
in other factors that could significantly affect our internal
controls subsequent to the date of their evaluation described
above.

17

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K

a) Financial Statements and Exhibits

1. Financial Statements

The following financial statements are presented in response to Part II,
Item 8:

2. Financial Statement Schedules

All schedules are omitted because they are not applicable, not required or
the information is included in the financial statements or notes thereto.

3. Exhibits

2.1 Combination Agreement between National-Oilwell, Inc. and Hydralift
ASA regarding the transaction announced October 11, 2002 (Exhibit
2.1) (5)

3.1 Amended and Restated Certificate of Incorporation of
National-Oilwell, Inc. (Exhibit 3.1) (1)

3.2 By-laws of National-Oilwell, Inc.

10.1 Employment Agreement dated as of January 1, 2002 between Merrill A.
Miller, Jr. and National Oilwell, with a similar agreement with
Steven W. Krablin (Exhibit 10.1) (2)

10.2 Employment Agreement dated as of January 1, 2002 between Dwight W.
Rettig and National Oilwell, with similar agreements with Robert L.
Bloom, Kevin Neveu, Mark A. Reese and Robert R. Workman (Exhibit
10.2) (2)

10.3 Employment Agreement dated as of June 28, 2000 between Gary W.
Stratulate and IRI International, Inc., which has now merged into
National Oilwell (Exhibit 10.3) (2)

10.4 Amended and Restated Stock Award and Long-Term Incentive Plan
(Exhibit 10.1) (3)*

10.5 Loan Agreement dated July 30, 2002 (Exhibit 10.2) (3)

10.6 Employment Agreement dated as of March 1, 2000 between Jon Gjedebo
and a National Oilwell subsidiary (Exhibit 10.8) (4)

10.7 Non-competition Agreement dated as of June 28, 2000 between Hushang
Ansary and National Oilwell (Exhibit 10.9) (4)

21.1 Subsidiaries of the Company

18

23.1 Consent of Ernst & Young LLP

24.1 Power of Attorney (included on signature page hereto)

99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

b) Reports on Form 8-K

A report on Form 8 - K was filed on October 16, 2002 regarding
a press release announcing the signing of a Combination Agreement to
acquire Hydralift ASA for NOK 55, approximately U.S. $7.33, per share.

A report on Form 8 - K was filed on November 14, 2002 which
contained the Combination Agreement of the previously announced transaction
with Hydralift ASA.

A report on Form 8 - K was filed on February 12, 2003
regarding a press release announcing our financial results for the fourth
quarter and full year ended December 31,2002.

- ----------

* Compensatory plan or arrangement for management or others

(1) Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on
August 11, 2000.

(2) Filed as an Exhibit to our Annual Report on Form 10-K filed on March
28, 2002.

(3) Filed as an Exhibit to our Quarterly Report on Form 10-Q filed on
November 12, 2002.

(4) Filed as an Exhibit to our Annual Report on Form 10-K filed on March
1, 2001.

(5) Filed as an Exhibit to our Current Report on Form 8-K filed on
November 14, 2002.

19

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.

NATIONAL-OILWELL, INC.

DATE: MARCH 6, 2003 BY: /s/ STEVEN W. KRABLIN
- ----------------------------- --------------------------------
STEVEN W. KRABLIN
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN
THE CAPACITIES AND ON THE DATES INDICATED.

EACH PERSON WHOSE SIGNATURE APPEARS BELOW IN SO SIGNING, CONSTITUTES AND
APPOINTS STEVEN W. KRABLIN AND M. GAY MATHER, AND EACH OF THEM ACTING ALONE, HIS
TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER OF SUBSTITUTION, FOR
HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO EXECUTE AND
CAUSE TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ANY AND ALL
AMENDMENTS TO THIS REPORT, AND IN EACH CASE TO FILE THE SAME, WITH ALL EXHIBITS
THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, AND HEREBY RATIFIES AND
CONFIRMS ALL THAT SAID ATTORNEY-IN-FACT OR HIS SUBSTITUTE OR SUBSTITUTES MAY DO
OR CAUSE TO BE DONE BY VIRTUE HEREOF.

20

CERTIFICATIONS

I, Merrill A. Miller, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of National-Oilwell, Inc.

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

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

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

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

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

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

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:

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

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

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Dated: March 6, 2003

/s/ Merrill A. Miller, Jr.
- ---------------------------
Merrill A. Miller, Jr.
Chief Executive Officer

21

I, Steven W. Krablin, certify that:

1. I have reviewed this annual report on Form 10-K of National-Oilwell, Inc.

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

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

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

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

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

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

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:

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

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

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Dated: March 6, 2003

/s/ Steven W. Krablin
- ---------------------
Steven W. Krablin
Chief Financial Officer

22

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
National-Oilwell, Inc.

We have audited the accompanying consolidated balance sheets of
National-Oilwell, Inc., as of December 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
National-Oilwell, Inc., at December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill and other intangible
assets.

/s/ ERNST & YOUNG LLP

Houston, Texas
February 18, 2003

23

NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

The accompanying notes are an integral part of these statements.

24

NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of these statements.

25

NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

The accompanying notes are an integral part of these statements.

26

NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these statements.

27

NATIONAL-OILWELL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

NATURE OF BUSINESS

We are a worldwide leader in the design, manufacture and sale of comprehensive
systems, components, and products used in oil and gas drilling and production,
as well as in distributing products and providing supply chain integration
services to the upstream oil and gas industry. Our revenues and operating
results are directly related to the level of worldwide oil and gas drilling and
production activities and the profitability and cash flow of oil and gas
companies and drilling contractors, which in turn are affected by current and
anticipated prices of oil and gas. Oil and gas prices have been and are likely
to continue to be volatile.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of
National-Oilwell, Inc. and its majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Investments that are not wholly-owned, but where we exercise control, are fully
consolidated with the equity held by minority owners reflected as minority
interest in the accompanying balance sheet and their portion of net income
(loss) is included in other income (expense) in the accompanying statement of
operations. Investments in unconsolidated affiliates, over which we exercise
significant influence, but not control, are accounted for by the equity method.

Fair Value of Financial Instruments

The carrying amounts of financial instruments including cash and cash
equivalents, receivables, and payables approximated fair value because of the
relatively short maturity of these instruments. Cash equivalents include only
those investments having a maturity date of three months or less at the time of
purchase. The carrying values of other financial instruments approximate their
respective fair values.

Derivative Financial Instruments

We record all derivative financial instruments at their fair value in our
consolidated balance sheet. All derivative financial instruments we hold are
designated as cash flow hedges and are highly effective in offsetting movements
in the underlying risks. Accordingly, gains and losses from changes in the fair
value of derivative financial instruments are deferred and recognized in
earnings as the underlying transactions occur. Because our derivative financial
instruments are so closely related to the underlying transactions, hedge
ineffectiveness is insignificant.

We use foreign currency forward contracts to mitigate our exposure to changes in
foreign currency exchange rates on firm sale commitments to better match the
local currency cost components of our fixed US dollar contracts. Such
arrangements typically have terms between three months and one year, depending
upon the customer's purchase order. We also use, from time to time, interest
rate contracts to mitigate our exposure to changes in interest rates on
anticipated long-term debt issuances. These contracts are typically short term
in nature. We do not use derivative financial instruments for trading or
speculative purposes.

28

Inventories

Inventories consist of oilfield products, manufactured equipment, manufactured
specialized drilling products and downhole motors and spare parts for
manufactured equipment and drilling products. Inventories are stated at the
lower of cost or market using the first-in, first-out or average cost methods.
Allowances for excess and obsolete inventories are determined based on our
historical usage of inventory on-hand as well as our future expectations related
to our substantial installed base and the development of new products. The
amount reserved, which totaled $49.4 million and $49.1 million at December 31,
2002 and 2001, respectively, is the recorded cost of the inventory minus its
estimated realizable value. Provisions for excess and obsolete inventories have
been immaterial in recent years.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Expenditures for major
improvements that extend the lives of property and equipment are capitalized
while minor replacements, maintenance and repairs are charged to operations as
incurred. Disposals are removed at cost less accumulated depreciation with any
resulting gain or loss reflected in operations. Depreciation is provided using
the straight-line method or declining balance method over the estimated useful
lives of individual items. Depreciation expense was $25.0 million, $27.1 million
and $24.7 million for the years ending December 31, 2002, 2001 and 2000.

Long-lived Assets

Effective January 1, 2002, we adopted SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS 144 superceded SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". The adoption of SFAS 144 had no effect on our results of operations. We
record impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than the carrying
amount of those assets. The net carrying value of assets not recoverable is
reduced to fair value if lower than carrying value. In determining the fair
market value of the assets, we consider market trends and recent transactions
involving sales of similar assets, or when not available, discounted cash flow
analysis.

Assets Held for Sale

In the course of integrating acquisitions and streamlining operations, we have
closed certain manufacturing facilities. Facilities where we have a formal plan
to sell the facility are classified as held for sale. We expect these facilities
to be sold within the next 1 to 3 years. When we designate an asset as held for
sale, we record its carrying value at the lower of its current carrying amount
or the estimated fair value less costs to sell and stop recording depreciation
expense.

Intangible Assets

Beginning in 2002, we adopted FAS 142 "Accounting for Goodwill and Other
Intangible Assets" and accordingly stopped amortizing goodwill that arose from
acquisitions before June 30, 2001. We also performed an impairment test as of
the beginning of 2002 that indicated no impairment of goodwill or other
intangibles. The effect of not amortizing goodwill and other intangibles in
periods prior to adoption follows (in thousands):

29

On at least an annual basis, we assess whether goodwill is impaired. Our annual
impairment tests are performed at the beginning of the 4th quarter of each year.
If we determine that goodwill is impaired, we measure that impairment based on
the amount by which the book value of goodwill exceeds its implied fair value.
The implied fair value of goodwill is determined by deducting the fair value of
a reporting unit's identifiable assets and liabilities from the fair value of
that reporting unit as a whole. Additional impairment assessments may be
performed on an interim basis if we encounter events or changes in circumstances
that would indicate that, more likely than not, the carrying amount of goodwill
has been impaired. Fair value of the reporting units is determined based on
internal management estimates.

Foreign Currency

The functional currency for our Canadian, United Kingdom, Norwegian, German,
Netherlands and Australian operations is the local currency. The cumulative
effects of translating the balance sheet accounts from the functional currency
into the U.S. dollar at current exchange rates are included in accumulated other
comprehensive income. The U.S. dollar is used as the functional currency for the
Singapore and Venezuelan operations. Accordingly, certain assets are translated
at historical exchange rates and all translation adjustments are included in
income. For all operations, gains or losses from remeasuring foreign currency
transactions into the functional currency are included in income.

Revenue Recognition

Our products and services are generally sold based upon purchase orders or
contracts with the customer that include fixed or determinable prices and that
do not include right of return or other similar provisions or other significant
post delivery obligations. We record revenue at the time the manufacturing
process is complete, the customer has been provided with all proper inspection
and other required documentation, title and risk of loss has passed to the
customer and when collectibility is reasonably assured. We also recognize
revenue on bill-and-hold transactions where the product has been completed and
is ready to be shipped, however at the customer's request, we store the product
on the customers' behalf for a brief period of time, typically less than one
year. Customer advances or deposits are deferred and recognized as revenue when
we have completed all of our performance obligations related to the sale. We
also recognize revenue as services are performed and as rental charges are
incurred.

Revenues for the construction of large rig packages are reported on the
percentage of completion method of accounting. Revenues and gross profit are
recognized as work is performed based

30

upon the relationship between actual costs incurred and total expected costs at
completion. All known or anticipated losses on contracts are provided for
immediately in earnings.

Income Taxes

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

Concentration of Credit Risk

We grant credit to our customers, which operate primarily in the oil and gas
industry. We perform periodic credit evaluations of our customers' financial
condition and generally do not require collateral, but may require letters of
credit for certain international sales. We maintain an allowance for doubtful
accounts for accounts receivables by providing for specifically identified
accounts where collectibility is doubtful and an additional allowance based on
the aging of the receivables compared to past experience and current trends.
Accounts receivable are net of allowances for doubtful accounts of approximately
$12.6 million and $9.1 million at December 31, 2002 and December 31, 2001,
respectively.

Stock-Based Compensation

We use the intrinsic value method in accounting for our stock-based employee
compensation plans.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect reported and contingent amounts of assets and
liabilities as of the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Recently Issued Accounting Standards

The Financial Accounting Standards Board issued Statement on Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations", which sets forth the accounting and reporting to be followed for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", addresses disposal activities and
termination costs in exiting an activity. These pronouncements are generally
effective January 1, 2003. The Company believes the adoption of these new
accounting pronouncements will not have a significant impact on its results of
operations or financial position.

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Net Income Per Share

The following table sets forth the computation of weighted average basic and
diluted shares outstanding (in thousands):

2. ACQUISITIONS

Year 2002

On December 18, 2002, we completed a cash tender offer for 92% of the common
shares of Hydralift ASA, a Norwegian based company specializing in the offshore
drilling equipment industry. By December 31, 2002, we had substantially
completed the acquisition of the remaining shares for a total purchase price,
including the assumption of debt, of approximately $300 million. The results of
Hydralift's operations have been included in our income statement since the
acquisition date.

As a result of this acquisition, we strengthened our position in the offshore
drilling market and gained access to new product lines that complement our
existing product offerings. The combination of our product offerings will open
new markets to us, particularly within the FPSO (floating production storage and
offloading) market.

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The purchase price will be allocated to the assets acquired and liabilities
assumed based on their relative fair values. A preliminary allocation of the
purchase price follows (in thousands):

Assets acquired:

Cash $ 47,387
Other current assets 138,709
Fixed assets 28,626
Other 24,920
Goodwill and other intangible assets 221,073
---------
460,715
Liabilities assumed:

Current liabilities 95,223
Debt obligations 93,101
Other 27,390
---------
215,714

Net assets acquired $ 245,001
=========

The final allocation of the purchase price will be based upon independent
appraisals and other valuations and may reflect other actions including product
line rationalizations or other actions. All of the goodwill from this
acquisition will be allocated to the Products and Technology segment and will be
fully deductible for tax purposes.

The following unaudited pro forma information assumes the acquisition of
Hydralift had occurred as of the beginning of each year shown (in thousands):

Adjustments made to derive the pro forma data relate principally to acquisition
financing. These results are not necessarily indicative of what actually would
have occurred if the acquisition had happened as of the beginning of 2002 or
2001 nor are they indicative of future results. The estimated effects of cost
reductions arising from the acquisition of Hydralift have been excluded.

In January 2002, we also completed the acquisition of the assets and business of
HAL Oilfield Pump & Equipment Company for approximately $16 million. This
business, which designs, manufactures and distributes centrifugal pumps, pump
packages and expendable parts, is complementary to our Mission pump product
line. Goodwill related to this acquisition was approximately $10 million and is
fully deductible for tax purposes.

During 2002 we also acquired two other businesses for approximately $1.2 million
in cash.

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Year 2001

In 2001, we acquired nine companies for an aggregate of $51 million in cash.
Individual purchase prices ranged from $0.6 million to $16.5 million. Each of
these acquisitions enhanced or expanded our market position within each of our
segments. Five of these acquisitions related to our Products and Technology
segment, including Integrated Power Systems, Maritime Hydraulics (Canada) Ltd.,
Tech Power Controls Company, Houston Scientific International, Inc. and Rigquip
UK business and related assets. The remaining acquisitions, including Demij (a
Netherlands distribution company), Rye Supply Company, Inc., Texas Oil Works
Supply, Inc. and Well-Serv, Inc. related to our Distribution segment. Aggregate
goodwill relating to these acquisitions was $30 million and approximately half
of this amount is deductible for tax purposes.

Year 2000

In February 2000, the merger with Hitec ASA was completed for approximately $158
million as we issued 7.9 million shares of common stock. This transaction was
accounted for as a purchase effective February 1, 2000 and generated goodwill of
approximately $150 million.

In June 2000, IRI International Corporation was merged with the Company and
accounted for as a pooling-of-interests. We issued 13.5 million shares of common
stock valued at approximately $447 million.

During 2000 we also acquired four other businesses for approximately $48 million
in cash. The purchase method of accounting was used to account for these
acquisitions and generated approximately $9 million in goodwill.

Subsequent Events

On January 2, 2003, we acquired LSI, a Houston, Texas based distributor of
specialty electrical products, for approximately $13 million. This transaction
generated approximately $6 million in goodwill and is complementary to our
distribution services business.

On January 16, 2003 we acquired the Mono pumping products business from
Halliburton Energy Services for approximately $89 million, consisting of $22.7
million in cash and 3.2 million shares of our common stock. This transaction,
which consisted of purchasing all the outstanding stock of Monoflo, Inc. in the
United States and Mono Group in the United Kingdom, generated approximately $46
million in goodwill.

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3. INVENTORIES

Inventories consist of (in thousands):

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of (in thousands):

5. LONG-TERM DEBT

Long-term debt consists of (in thousands):

In November 2002, we sold $200 million of 5.65 % unsecured senior notes due
November 15, 2012. Proceeds were used to acquire Hydralift ASA. Interest is
payable on May 15 and November 15 of each year. In March 2001, we sold $150
million of 6.50 % unsecured senior notes due March 15, 2011, with interest
payable on March 15 and September 15 of each year. In

35

June 1998, we sold $150 million of 6.875 % unsecured senior notes due July 1,
2005, with interest payments due annually on January 1 and July 1.

On July 30, 2002, we replaced the existing credit facility with a new three-year
unsecured $175 million revolving credit facility. This facility is available for
acquisitions and general corporate purposes and provides up to $50 million for
letters of credit, of which $22.0 million were outstanding at December 31, 2002.
Interest is based upon prime or Libor plus 0.5% subject to a ratings based grid.
In securing this new credit facility, we incurred approximately $0.9 million in
fees which will be amortized to expense over the term of the facility.

The senior notes contain reporting covenants and the credit facility contains
financial covenants and ratios regarding maximum debt to capital and minimum
interest coverage. We were in compliance with all covenants governing these
facilities at December 31, 2002.

We also have additional credit facilities totaling $223 million that are used
primarily for acquisitions, general corporate purposes and letters of credit.
Recently acquired Hydralift ASA represents $152 million of these facilities.
These multi-currency Hydralift committed facilities are secured by a guarantee,
contain financial covenants and expire in 2006. These instruments carry interest
at a pre-agreed upon percentage point spread from either the prime interest rate
or NIBOR. Borrowings against these additional credit facilities totaled $93
million at December 31, 2002 and an additional $39 million had been used for
letters of credit and guarantees.

6. PENSION PLANS

National Oilwell and its consolidated subsidiaries have pension plans covering
substantially all of its employees. Defined-contribution pension plans cover
most of the U.S. and Canadian employees and are based on years of service, a
percentage of current earnings and matching of employee contributions. For the
years ended December 31, 2002, 2001 and 2000, pension expense for
defined-contribution plans was $9.1 million, $6.0 million and $4.2 million, and
all funding is current.

Certain retired or terminated employees of predecessor or acquired companies
also participate in defined benefit plans in the United States which have been
retained by National Oilwell subsidiaries but which no longer accrue benefits.
Active employees are ineligible to participate in any of these defined benefit
plans. Our subsidiaries in the United Kingdom have a defined benefit pension
plan whose participants are primarily retired and terminated employees who are
no longer accruing benefits. In addition, approximately 160 U.S. retirees and
spouses participate in defined benefit health care plans of predecessor or
acquired companies that provide postretirement medical and life insurance
benefits. Pension assets are principally invested in a fixed income bond fund,
equity securities, United Kingdom government securities and cash deposits.

36

The change in benefit obligation, plan assets and the funded status of the
defined pension plans in the United States and the United Kingdom, and defined
postretirement plans in the United States, follows:

37

Significant assumptions used for the plans follow:

A 17% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2003, decreasing by approximately 3% points per year to
5.5% in 2007, with 5.5% increases per year thereafter.

Net periodic benefit cost (credit):

Assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement benefits. A one percentage point change in
assumed health care cost trend rates would have the following effects:

In addition, our subsidiaries in Norway have defined benefit pension plans. The
pension plan assets are invested primarily in equity securities, overseas bonds,
real estate and cash deposits. At December 31, 2002, the plan assets at fair
market value and the projected benefit obligation were approximately $12.0
million.

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7. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)

The components of other comprehensive loss are as follows (in thousands):

8. COMMITMENTS AND CONTINGENCIES

We lease land, buildings, storage facilities, vehicles, data processing
equipment and software under operating leases expiring in various years through
2012. Rent expense for the years ended December 31, 2002, 2001 and 2000 was
$21.2 million, $19.0 million and $12.6 million. Our minimum rental commitments
for operating leases at December 31, 2002 were as follows: 2003 - $17.7 million;
2004 - $13.8 million; 2005 - $9.9 million; 2006 - $6.8 million; 2007 - $5.8
million and subsequent to 2007 - $9.7 million.

We are involved in various claims, regulatory agency audits and pending or
threatened legal actions involving a variety of matters. The total liability on
these matters at December 31, 2002 cannot be determined; however, in our
opinion, any ultimate liability, to the extent not otherwise provided for,
should not materially affect our financial position, liquidity or results of
operations.

Our business is affected both directly and indirectly by governmental laws and
regulations relating to the oilfield service industry in general, as well as by
environmental and safety regulations that specifically apply to our business.
Although we have not incurred material costs in connection with our
compliance with such laws, there can be no assurance that other developments,
such as stricter environmental laws, regulations and enforcement policies
thereunder could not result in additional, presently unquantifiable costs or
liabilities to us.

39

9. COMMON STOCK

National Oilwell has authorized 150 million shares of $.01 par value common
stock. We also have authorized 10 million shares of $.01 par value preferred
stock, none of which is issued or outstanding.

Under the terms of National Oilwell's Stock Award and Long-Term Incentive Plan,
as amended, 8.4 million shares of common stock are authorized for the grant of
options to officers, key employees, non-employee directors and other persons.
Options granted under our stock option plan generally vest over a three-year
period starting one year from the date of grant and expire five or ten years
from the date of grant. The purchase price of options granted may not be less
than the market price of National Oilwell common stock on the date of grant. At
December 31, 2002, approximately 4.2 million shares were available for future
grants.

We also have inactive stock option plans that were acquired in connection with
the acquisitions of Dreco Energy Services, Ltd. in 1997, and of Hitec ASA and
IRI International Corporation in 2000. We converted the outstanding stock
options under these plans to options to acquire our common stock and no further
options are being issued under these plans. Stock option information summarized
below includes amounts for the National Oilwell Stock Award and Long-Term
Incentive Plan and stock plans of acquired companies.

Options outstanding at December 31, 2002 under the stock option plans have
exercise prices between $5.62 and $40.50 per share, and expire at various dates
from February 19, 2003 to August 15, 2012.

The following summarizes options activity:

40

The following summarizes information about stock options outstanding as of
December 31, 2002:

The weighted average fair value of options granted during 2002, 2001 and 2000
was approximately $8.95, $22.04, and $15.70 per share, respectively, as
determined using the Black-Scholes option-pricing model. Assuming that we had
accounted for our stock-based compensation using the alternative fair value
method of accounting under FAS No. 123 and amortized the fair value to expense
over the option's vesting period, our net income and net income per share would
have been (in thousands, except per share data):

These pro forma results may not be indicative of future effects.

The assumptions used in the Black-Scholes option-pricing model were:

The Company evaluates annually the grant of options to eligible participants and
in February 2003, 977,500 options to purchase shares of common stock were
granted at an exercise price of $20.14, the fair value of the common stock at
the date of grant.

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10. INCOME TAXES

The domestic and foreign components of income before income taxes were as
follows (in thousands):

The components of the provision (benefit) for income taxes consisted of
(in thousands):

42

The difference between the effective tax rate reflected in the provision for
income taxes and the U.S. federal statutory rate was as follows (in thousands):

Significant components of National Oilwell's deferred tax assets and
liabilities were as follows (in thousands):

In the United States, the Company has $12.0 million of net operating loss
carryforwards as of December 31, 2002, which expire at various dates through
2017. These operating losses were acquired primarily in the combination with
Dreco Energy Services, Ltd. and are associated with Dreco's US subsidiary. As a
result of share exchanges occurring since the date of the combination resulting
in a more than 50% aggregate change in the beneficial ownership of Dreco, the
availability of these loss carryforwards to reduce future United States federal
taxable income may have become subject to various limitations under Section 382
of the Internal Revenue Code of 1986, as amended. In addition, these net
operating losses can only be used to offset separate company taxable income of
Dreco's US subsidiary. Since the ultimate realization of these net operating
losses is uncertain, the related potential benefit of $4.2 million has been
recorded with a $2.8 million valuation allowance. Future income tax expense will
be reduced if the Company ultimately realizes the benefit of these net operating
losses.

43

Also in the United States, the Company has $9.1 million of capital loss
carryforwards as of December 31, 2002, which expire at various dates through
2005. The related potential benefit of $3.5 million has been recorded with a
valuation allowance of $3.5 million. These capital losses are not available to
reduce future operating income but are expected to be realized as deductions
against future capital gains. The Company has $ 15.1 million of excess foreign
tax credits as of December 31, 2002, which expire at various dates through 2006.
These credits have been allotted a valuation allowance of $ 14.1 million and
would be realized as a reduction of future income tax expense.

Outside the United States, the company has $67.5 million of net operating loss
carryforwards as of December 31, 2002. Of this amount, $65.3 million will expire
at various dates through 2012 and $2.2 million is available indefinitely. The
related potential benefit available of $19.7 million has been recorded with a
valuation allowance of $9.6 million. If the Company ultimately realizes the
benefit of these net operating losses, $9.4 million would reduce goodwill and
other intangible assets and $10.3 million would reduce income tax expense.

The deferred tax valuation allowance increased $0.4 million for the period
ending December 31, 2002 and $1.2 million for the period ending December 31,
2001. These increases resulted primarily from the recognition of additional
excess foreign tax credits that may not be realized in the future.
National-Oilwell's deferred tax assets are expected to be realized principally
through future earnings.

Undistributed earnings of the Company's foreign subsidiaries amounted to $193.4
million and $149.2 million at December 31, 2002 and December 31, 2001,
respectively. Those earnings are considered to be permanently reinvested and no
provision for U.S. federal and state income taxes has been made. Distribution of
these earnings in the form of dividends or otherwise could result in either U.S.
federal taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable in various foreign countries. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practical; however,
unrecognized foreign tax credit carryforwards would be available to reduce some
portion of the U.S. liability. Withholding taxes of approximately $23.4 million
would be payable upon remittance of all previously unremitted earnings at
December 31, 2002.

11. SPECIAL CHARGE

During 2000, we recorded a special charge, net of a $0.4 million credit from
previous special charges, of $14.1 million ($11.0 million after tax, or $0.14
per share) related to the merger with IRI International. Components of the
charge were (in millions):

Direct transaction costs $ 6.6
Severance 6.4
Facility closures 1.5
------
14.5
Prior year reversal (0.4)
------
$ 14.1
------

(1) Includes a special charge of $14,082 for 2000 related to the merger
with IRI.

(2) Includes $15,684 of inventory write-offs related to the merger with
IRI.

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Geographic Areas:

13. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly results were as follows (in thousands, except per share
data):

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INDEX TO EXHIBITS