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TABLE OF CONTENTS
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

COMMISSION FILE NUMBER 1-12881

LONE STAR TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)

15660 N. DALLAS PARKWAY, SUITE 500
DALLAS, TEXAS 75248
(972) 770-6401

I.R.S. EMPLOYER IDENTIFICATION NUMBER: 75-2085454

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

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

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

        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. ý

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

        The aggregate market value of common stock on June 28, 2002 held by nonaffiliates of the registrant was approximately $653.3 million, based on the closing price of the common stock on the New York Stock Exchange.

        As of February 14, 2003, the number of shares of common stock outstanding was 28,376,628.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of registrant's Proxy Statement for its 2003 Annual Meeting of Shareholders are incorporated by reference into Part III hereof.

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

GENERAL

        Lone Star Technologies, Inc., a Delaware corporation, is a leading domestic manufacturer and marketer of premium welded "oil country tubular goods", or "OCTG" which are steel tubular products used in the completion and production of oil and natural gas wells. We are a major manufacturer of line pipe, which is used in the gathering and transmission of oil and natural gas. In addition, we are a leading manufacturer of specialty tubing products used in industrial, automotive, construction, agricultural and power technology applications. We also market oil country tubular goods and line pipe produced by other companies through exclusive arrangements. Lone Star began producing and marketing oil country tubular goods and other tubular products nearly 50 years ago. As used in this report, the terms "we," "us", "our" and "Lone Star" refer to Lone Star Technologies, Inc. and its subsidiaries and affiliates unless the context indicates otherwise.

        In January 2000, we acquired the assets of Fintube Limited Partnership, the largest domestic specialty tubing manufacturer of heat recovery finned tubulars, which are used in various applications including fuel economizers, petrochemical plants, refineries and combined-cycle electrical power generation. Also in 2000, we completed the acquisition of the assets of Bellville Tube Corporation ("Bellville"), a manufacturer of casing, tubing and line pipe for the oil and gas industry. On October 1, 2002, we acquired the majority of the assets of Wheeling Machine Products, Inc. and Wheeling Machine Products of Texas, Inc. (collectively, "Wheeling"), one of the largest domestic suppliers of couplings used to connect individual sections of oilfield casing and tubing.

OUR STRATEGY

        Our goal is to be the leading provider of both oilfield tubular products and specialty tubing products and to increase our market presence in order to benefit from favorable market conditions. The key elements of our strategy to achieve commercial leadership and operational excellence are:

        Achieving increased production, greater productivity and penetration into new markets through capital investment and commercial alliances expansion.    We constantly seek to improve our production efficiency by upgrading our manufacturing technologies. By becoming more efficient, we will be able to continue offering our products at attractive prices to an increasing number of customers. Through our exclusive commercial alliances with several mills, we have been able to outsource production of specific types of oil country tubular goods, line pipe and specialty tubing, enabling us to concentrate our capital expenditures and manufacturing expertise on our premium products and new technologies. Expanding these alliances will enable us both to offer a wider variety of tubular products to our customers and to increase our production of premium products.

        Continuing to develop and market new product applications and technologies.    We have historically been successful in pioneering new production capabilities to expand the market acceptance of our oil country tubular goods, line pipe and specialty tubing products. For example, we pioneered the electric resistance welded, full-body normalized process, which, together with our extensive heat-treating capabilities, enables us to manufacture and sell our oil country tubular goods and line pipe for deep wells and other critical applications. We have also developed expandable casing products which are used in critical repair and extended reach drilling applications to save time and costs. In addition, we have produced and sold slotted tubes for expandable sand screens and new rise sleeves to provide solutions for completion in unconsolidated sand formations and subsea completions, respectively. We will continue to invest in new technologies and develop new products for the markets we serve.

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        Growing through strategic acquisitions.    Our acquisitions of Fintube, Bellville and Wheeling enabled us to increase our production capacity and expand the selection of products we offer and the markets we serve at a cost significantly less than that required to develop these operations on our own. In 2002, we successfully integrated Wheeling into our product mix to provide Lone Star both an internal supplier and a reseller of OCTG couplings. We will continue to pursue strategic acquisitions that we believe to be beneficial to our business.

INDUSTRY BACKGROUND

        Oilfield Products.    Oil country tubular goods, or OCTG, include casing and tubing, which we manufacture, as well as drill pipe, which we do not manufacture. Casing acts as a structural retainer wall in oil and natural gas wellbores to provide support and prevent caving during drilling operations and is used to protect water-bearing formations during the drilling of a well. Casing is generally not removed after it has been installed in a well. Tubing, which is used to transmit oil and natural gas to the surface, may be replaced during the life of a producing well.

        Demand for oil country tubular goods depends primarily on the number of oil and natural gas wells being drilled, completed and re-worked and the depth and drilling conditions of these wells. The level of these activities depends primarily on natural gas and oil prices and industry expectations of future prices. A key indicator of domestic demand is the average number of drilling rigs operating in the United States. According to the Baker Hughes rig count, the most commonly cited indicator of the level of domestic drilling activity, the average United States rig count was 830 in 2002 compared to 1,156 and 918 in 2001 and 2000, respectively. The pickup in drilling activity that was expected to occur in the latter half of 2002 did not materialize. In addition, although oil and gas prices generally increased during the year, domestic drilling activity did not respond in-kind due principally to geopolitical instabilities. At year-end, 862 rigs were working, of which 84% were drilling for natural gas. The decrease in average drilling activity during 2002 resulted in less demand for our oilfield products.

        The oil country tubular goods market is also affected by the level of inventories maintained by manufacturers, distributors, threading companies and end users. During downturns in drilling activity, customers typically utilize the inventory of these products rather than purchase new products, causing demand for new production to further decrease, which happened throughout 2002. Conversely, in periods of increased drilling activity, increases in oil country tubular goods inventory levels by distributors and end users typically occur, accelerating demand for new production.

        The amount of imported oilfield products also affects the oil country tubular goods market. Imported oil country tubular goods accounted for approximately 31% of the apparent supply available to the domestic oil country tubular goods market during 2002, and 37% during 2001. Protective tariffs on several foreign countries were imposed in 1995. These trade tariffs, which were intended to promote an equitable trade environment, were extended for another five years during 2001. In June 2000, the United States government completed sunset reviews or orders covering Argentina, Italy, Japan, Korea and Mexico in June 2001 and kept those orders in place, the orders remain subject to future sunset reviews beginning in 2005, and to annual reviews by the Department of Commerce. The affirmative sunset review determinations have been appealed to the Court of International Trade, and Argentina has appealed to the World Trade Organization. If those orders are revoked in full or in part or the duty rates are lowered, we could be exposed to increased competition from imports that could decrease our sales and profits, or increase our losses. In the case of line pipe, a successful Section 201 case implemented in March 2000 restricting imports of API ERW in sizes up to 16-inch in diameter expired March 1, 2003.

        Manufacturers produce oil country tubular goods in numerous sizes, weights, grades and thread profiles. The grade of pipe used in a particular application depends on technical requirements for strength, corrosion resistance and other performance characteristics. Oil country tubular goods are

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generally classified by "carbon" and "alloy" grades. Carbon grades of oil country tubular goods have yield strengths of 75,000 pounds per square inch or less and are generally used in oil and natural gas wells drilled to depths less than 8,000 feet. Alloy grades of oil country tubular goods, often referred to as premium goods, have yield strengths of 75,000 pounds per square inch or more and are generally used in oil and natural gas wells drilled to depths in excess of 8,000 feet or for high temperature wells, highly corrosive wells or other critical applications.

        Carbon and alloy grades of oil country tubular goods are available from both electric resistance welded ("ERW") and seamless tube producers. Electric resistance welded tubes are produced by processing flat rolled steel into strips which are cold-formed, welded, full-body normalized or seam-annealed and end-finished with threads and couplings. Seamless products are produced by individually heating and piercing solid steel billets into tubes and then end finishing those tubes into oil country tubular goods in a manner similar to electric resistance welded pipe.

        Based on published industry statistics, electric resistance welded products now account for approximately half of the tonnage of domestic casing and tubing consumed. Electric resistance welded, full-body normalized casing and tubing and seamless casing and tubing compete for critical applications such as deep natural gas wells and offshore wells. Customers purchasing products for these applications require high-performance oil country tubular goods that can sustain enormous pressure as measured by burst, collapse and yield strength. Operators drilling shallow wells generally purchase oil country tubular goods based primarily on price and availability, as wells of this nature require less stringent performance characteristics.

        Line pipe products are used for surface production flow lines and gathering and transmission of oil, natural gas and fluids. Line pipe is primarily produced in welded form. Line pipe markets are dependent not only on the factors which influence the oil country tubular goods market, but also on pipeline construction activity, line pipe replacement requirements, new residential construction and utility purchasing programs. Line pipe sales often lag oil country tubular goods sales by twelve or more months.

        Couplings are used to connect individual sections of oilfield casing and tubing. We manufacture a full product size range of high quality couplings including both standard oilfield American Petroleum Institute ("API") grades as well as premium connections. The market for couplings is dependent on the same factors that impact the oil country tubular goods market.

        Specialty Tubing Products.    The specialty tubing business includes the manufacture, marketing and sale of a broad variety of steel tubing products, including premium and custom-made products. Applications for specialty tubular products include precision mechanical tubular products for automotive, fluid power and other markets for various mechanical applications and finned tubular products for heat recovery applications.

        The demand for precision mechanical tubulars and other specialty tubing used for automotive, fluid power and other mechanical applications is cyclical and dependent on the general economy, the automotive and construction industries, product inventory levels and other factors affecting domestic goods activity. Demand for precision mechanical tubulars within the traditional markets was down significantly in 2001 as a result of the recession experienced in the United States during the calendar year. Only the strong demand from the automotive sector kept demand for precision mechanical tubulars for 2002 on par with 2001. As occurred in 2001, the continuing decline in the economy resulted in further decreased demand for precision mechanical tubing during the fourth quarter of 2002. Demand for mechanical tubing is not expected to increase until general domestic economic conditions improve.

        Demand for finned tubular products depends on, among other factors, combined-cycle electrical power plant construction, and the cost of alternative fuels for power generation and, to a lesser extent,

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on industrial processing plant and petrochemical plant construction. Demand slowed considerably in 2002 for these products as construction of new power plants was curtailed due to lower energy demand attributable to the slowdown in the general economy and constraints on capital to fund the construction projects. Power plant construction curtailments and cancellations are expected to continue during 2003.

        Flat Rolled Steel and Other Products.    We have a rolling mill which has the capacity to produce 1.4 million tons of flat rolled steel per year. Participation in flat rolled steel markets allows us to maintain flexibility in procurement of lower cost steel. Flat rolled steel, produced primarily for the manufacture of oilfield and specialty tubing products, is also sold to fabricators of various construction and industrial products. The market for flat rolled steel is affected by a number of factors, including price, capacity utilization and material costs. Flat rolled steel is sold in highly competitive markets and price, quality and availability are the main determinants of customer purchasing decisions. Other products consist of tubular goods that serve a variety of uses, such as structural piling applications in the construction industry.

OUR OILFIELD PRODUCTS

        Products.    We manufacture and market premium oil country tubular goods. Our oil country tubular goods include casing and production tubing but not drill pipe. We also manufacture and market line pipe and couplings.

Oil Country Tubular Goods

        We manufacture premium alloy and carbon welded oil country tubular goods, including casing, which acts as a structural retainer wall in oil and natural gas wellbores, and production tubing, which transmits hydrocarbons to the surface. We offer casing and tubing products with the widest variety of diameters, grades and wall thicknesses in the United States. This variety provides us with a distinct competitive advantage as a single source supplier of a complete range of oilfield casing and production tubing. As a result of our broad product range and unique heat-treating capabilities, we are able to service nearly all typical drilling applications for oil and natural gas wells.

        Casing, which historically represents about 83% of the oil country tubular goods tonnage sold by us, is the structural retainer wall in oil and natural gas wellbores. It also serves to prevent pollution of nearby water reservoirs and contamination of a well's production. Casing is generally not removed after it has been installed. Production tubing is installed within the casing to convey oil and natural gas to the surface. We offer the widest grades and ranges of outside diameters in casing (3¹/2" to 20") and tubing (1.9" to 3¹/2") produced in the United States, including products that have been successfully used in wells with depths of over 30,000 feet.

        Our premium product line includes tubulars manufactured with the electric resistance welded, full-body normalized process and other thermal techniques that we pioneered. Because this process gives our tubes better performance characteristics than typical seam-annealed casing and tubing, we are able to serve both primary markets for oil country tubular goods: deep critical wells and shallow wells. Our premium products successfully compete both with seamless oil country tubular goods for critical applications and with conventional seam-annealed tubular products manufactured for shallow wells. We also offer seamless and seam-annealed products through marketing arrangements with other producers.

        Critical applications, such as deep natural gas wells and offshore wells, require high-performance casing and tubing that can withstand enormous pressure as measured by burst strength, collapse strength and yield strength. Both major and independent oil companies that conduct drilling programs of this nature emphasize quality and compliance with specific standards. In our electric resistance welded, full-body normalized manufacturing process, which meets and exceeds API standards, we heat treat the entire tube and not just the weld area. This process strengthens the entire tube and makes our premium casing, tubing and line pipe interchangeable with seamless tubulars for nearly all critical applications. Typically, approximately 45% to 60% of our annual oil country tubular goods tonnage

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consists of premium, high-strength tubular products. Because of higher levels of deeper drilling, particularly for natural gas, 66% of our oil country tubular goods revenues during both 2002 and 2001 were from high-strength alloy grade products compared to 57% in 2000.

        Operators drilling shallow wells generally purchase oil country tubular goods based primarily on price and availability, as wells of this nature require less stringent performance characteristics. We compete in this market, which is served primarily by producers of seam-annealed oil country tubular goods, with our Wildcat™ brand of oil country tubular goods and products produced through our exclusive alliance mills.

Line Pipe

        We offer the widest size and chemistry range of line pipe used to gather and transmit oil and natural gas in the United States with outside diameters from 2³/8" to 60". Historically, approximately 20% to 25% of our oilfield product revenues are from line pipe sales.

Couplings

        With the acquisition of Wheeling in the fourth quarter 2002, we now have the ability to provide a full range of coupling products used to connect individual sections of oilfield casing and production tubing from 2³/8" to 20", including premium grades and premium threads. The demand for coupling products is correlative to demand for our OCTG products. Prior to its acquisition by Lone Star, Wheeling had a multi-year partnering arrangement with Lone Star Steel Company ("Steel") to provide 100% of Steel's coupling requirements. In addition to Steel, which comprised approximately 47% of Wheeling's 2002 sales, other key customers with whom Wheeling maintains distribution arrangements include U.S. Steel and V&M Star.

        Sales and Distribution.    Our domestic oil country tubular goods sales distribution network consists of 14 non-exclusive distributors that maintain and deliver product inventory to major and independent oil and gas companies that explore for oil and natural gas. We also sell line pipe through distributors and directly to end-users. Internationally, oil country tubular goods are sold through distributors and trading companies as well as directly to end-users. Approximately 3% of the tonnage of oil country tubular goods and 2% of the tonnage of line pipe that we shipped in 2002 were to destinations outside the United States. Our two largest customers, both distributors of our oilfield products in 2002, accounted for approximately 14% each, of the total oil country tubular good tons we shipped. About 78% of the oil and natural gas wells drilled in the United States in 2002 were located in Texas, Oklahoma, Kansas, Louisiana, New Mexico and the federal waters of the Gulf of Mexico, all located within 750 miles of our mills in Texas. The majority of our oilfield products were sold for use in these states, as well as the Gulf of Mexico, which is less than 250 miles from our mills.

        Alliance Mills.    In addition to production from our mills, we have marketing agreements to sell other steel oilfield tubular products manufactured by several companies. Through commercial alliances with several mills, we have expanded our oilfield product offering. These arrangements enable us to outsource production of specific products, allowing us to offer a wider variety of casing, tubing and line pipe without a permanent capital investment. These alliances allow us to concentrate our capital expenditures and manufacturing expertise on our premium products, while offering our customers a complete size range of casing, tubing and line pipe. These transactions are performed on a commission basis and through purchase and resale of the products. Our alliance arrangements accounted for approximately 21% and 22% of our revenues from oilfield products during 2002 and 2001, respectively.

        Competition.    Oil country tubular goods and line pipe are sold in highly competitive markets. Once users of oil country tubular goods determine which performance characteristics are relevant, they base their purchasing decisions on four factors: quality, availability, service and price. We believe that we are competitive in all of these areas. We successfully compete with both seamless oil country tubular goods and seam-annealed electric resistance welded products, as described above under "Business-Industry

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Background—Oilfield Products." Our electric resistance welded, full-body normalized casing and tubing products compete with seamless oil country tubular goods, and we offer products with the widest variety of diameters, grades and wall thicknesses in the United States. Several domestic manufacturers produce limited lines of oil country tubular goods, and a number of foreign manufacturers produce oil country tubular goods for export to the United States.

        The level of imports of oil country tubular goods from Canada and Taiwan was greatly reduced by the existence of antidumping duty orders from 1986 until revocation in June 2000. In addition, since 1995, the level of imports of oil country tubular goods from Argentina, Italy, Japan, Korea and Mexico has been greatly reduced by the existence of antidumping duty orders covering imports from these countries and a countervailing duty order covering imports from Italy. The orders also have had a beneficial impact on prices for oil country tubular goods in the domestic market. Affected parties can request administrative reviews of imposed duties and tariffs. These orders against Argentina, Italy, Japan, Korea, and Mexico were reviewed through the International Trade Commission in 2001 and were extended for an additional five-year period at that time. The affirmative sunset review determinations have been appealed to the Court of International Trade, and Argentina has appealed to the World Trade Organization. The domestic oil country tubular goods industry filed a number of trade cases in the first half of 2002 against 13 countries for unfairly imported OCTG; however, these cases were dismissed at the International Trade Commission level by a four-to-one margin.

        In February 2000, in response to a petition filed by domestic welded line pipe producers and their workers, including us, the United States government granted relief to the line pipe industry under Section 201 of the Trade Act of 1974. The relief, effective March 1, 2000, restricts imports of welded line pipe not exceeding 16 inches in outside diameter to a maximum of 9,000 tons from any country other than Canada and Mexico. Imports in excess of that amount were subject to significant tariffs. This Section 201 case will expire in March 2003.

OUR SPECIALTY TUBING PRODUCTS

        Products.    Our specialty tubing business includes the manufacture, marketing and sale of a variety of tubular products. Our specialty tubular products are generally high value-added premium or custom products often involved in exacting applications. Our specialty tubing products include finned tubulars used in industrial processing, petrochemical plants and power technology applications.

Precision Mechanical Tubulars

        We have one of the largest production capacities in the world for precision mechanical tubular products using the Drawn Over Mandrel manufacturing process. The use of the Drawn Over Mandrel manufacturing process enables us to achieve higher critical tolerances and dimensional control than other processes. Our precision mechanical tubular product line includes a wide array of high-quality, custom-made steel tubular products with precise dimensional control and special metallurgical properties. Our precision mechanical tubular products have the widest size range in the world, from ¹/2" to 15" in outside diameter, and are made from a variety of combinations of chemical compositions, thermal treatments, mechanical properties and surface finishes. Product uses include the manufacture of hydraulic cylinders for construction and farm equipment; automotive applications, such as stabilizers and intrusion tubes; and other uses, including machine parts, bearing races, down-hole pump barrels, heavy-lift crane boom chords, drill rods and liner hangers. As a result of the wide range of industrial applications for precision mechanical tubular products, sales traditionally follow general domestic economic conditions.

        The Drawn Over Mandrel process uses a drawbench to pull tubing through a die and over a mandrel to shape and smooth surfaces and impart precise dimensional tolerances to tubes. Our production facilities include seven drawbenches. Our 1,000,000 pound drawbench, the largest in the Western Hemisphere, combined with our 800,000 pound drawbench enable us to access broader

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markets through the manufacture of larger diameter, thicker wall products. Order quantities for our precision mechanical tubular products are typically less than 20,000 pounds, and the products are made to exact customer specifications.

Finned Tubular Products

        We manufacture custom-engineered specialty finned tubular products used in a variety of heat recovery applications. We have the major portion of domestic manufacturing capacity for finned tubes and fabrication of heat recovery steam generators. Finned tubes are steel tubes with various types of fins or studs welded to the outside to increase the amount of surface area for maximized recovery of heat. Our heat recovery products are used in fuel economizers, petrochemical plants, refineries and combined-cycle electrical power generation.

        In connection with our production of finned tubes, we design and manufacture other products relating to large-scale applied heat recovery technology, such as boiler tubing and economizers. Economizers are bundles of finned tubes arranged to maximize the amount of heat captured from boiler exhaust gases. Economizers are normally used on large boilers for office buildings, hospitals, universities, prisons, breweries and food processing plants. We also manufacture and sell X-ID tubing, which has specific patterns on the interior surface of the tube for enhanced heat transfer.

Other Specialty Tubing Products

        We also produce hot finished specialty tubing. We have developed new thick wall products using enhanced hot reduction technology for applications such as heavy axles for trailers and light axles for trucks, including sport utility vehicles, that were typically made out of seamless tubes. This product is also used for other industrial applications.

        Sales and Distribution.    Domestically, we market and sell our precision mechanical tubulars through 19 non-exclusive steel service centers and directly to end-users. Our precision mechanical tubulars have detailed design specifications and in some cases long lead times, making annual contracts an efficient mechanism for large purchasers. Internationally, the majority of our precision mechanical tubulars is currently sold directly to end-users and exports accounted for approximately 11% in 2002 and 22% in 2001 of the shipment tonnage of our precision mechanical tubulars. We market our finned tubes and other heat recovery products through a small domestic sales force, an international sales manager based in Quebec and independent distributors. Exports of finned tubulars and other heat recovery tubes accounted for approximately 11% and 18% of the revenues from those products in 2002 and 2001, respectively.

        Competition.    The market for specialty tubing is competitive and is served by several manufacturers. We have one of the largest capacities in the world to manufacture precision mechanical tubulars using the Drawn Over Mandrel manufacturing process.

        Since these products are made to end user specifications and often require just-in-time delivery, only small quantities are imported into the United States. In contrast to the oil country tubular goods market, seamless and electric resistance welded specialty tubing products differ in their applications. Electric resistance welded tubing, such as precision mechanical tubulars, is preferred for many mechanical tubing applications because its consistent wall thickness requires less machining in the finishing process. In contrast, seamless tubes are used primarily in heavy gauge applications such as boiler and pressure tubing.

        Based on generally available market data, we estimate that we have a major portion of the domestic manufacturing capacity for finned tubes used for heat recovery steam generation. We have one significant domestic competitor and a number of smaller foreign competitors.

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OUR FLAT ROLLED STEEL AND OTHER PRODUCTS AND SERVICES

        Products and Services.    We also manufacture and market flat rolled steel and other miscellaneous products that are secondary to our manufacture of oilfield and specialty tubing products. Flat rolled steel is primarily used by us in the manufacture of tubular products. We also sell flat rolled steel to fabricators of large diameter transmission pipe, storage tanks, rail cars and a variety of other construction and industrial products. Our participation in the flat rolled steel commodity market provides us flexibility in sourcing lower cost steel for our tubular products and to some extent involves our excess capacity for flat rolled steel as related to the manufacture of our oilfield and specialty tubing products.

        We also market other products such as tubulars for use in structural and piling applications in the construction industry, and we provide transportation, storage and other services.

        We also have a stand-alone steel coil slitting business and a steel rod to thin steel strip manufacturing process. This business includes a steel coil storage and processing business, where we provide profitable, toll slitting services for major steel customers and also provide steel storage and custom cutting. The steel coil division ships its processed steel on a just-in-time basis for outside customers and to our finned tubing manufacturing operations. We own the rights to our patented cold-rolling process for flattening steel rod into narrow bands of thin-gauge steel which we use as finning material for our finned tubes and thin strip steel we sell to third parties.

        Sales and Distribution.    We manufacture and sell flat rolled steel directly to end-users and through service centers, primarily in the Southwestern region of the United States. The largest customer of our flat rolled steel, Friedman Industries, Inc., historically has accounted for more than 75% of our flat rolled steel sales, as well as substantially all other sales of miscellaneous tubular products other than oilfield and specialty tubing products. This customer has steel processing facilities located adjacent to our facilities in Lone Star, Texas, and those facilities purchase most of their flat rolled steel from us. Sales to this customer represented approximately 8%, 8% and 9% of our total revenues for 2002, 2001 and 2000, respectively.

        We sell thin strip steel directly to end users in North America through a small sales force. Flat rolled steel processing services are also sold to steel mills where we receive processing revenues but do not purchase and resell steel.

        Competition.    Our flat rolled steel is sold in highly competitive markets generally concentrated in the Southwestern region of the United States. Sales and earnings are affected by the cost of raw materials, use of flat rolled steel by us in the manufacture of our tubular products, demand by outside customers and general economic conditions. Our thin strip flat rolled steel and steel coil slitting services compete against service centers located in the Midwest.

FINANCIAL INFORMATION ABOUT SEGMENTS

        For financial information for each segment regarding revenues, profits or losses (as applicable) and total assets, see "Business Segments—Note B" of the Notes to Consolidated Financial Statements.

CUSTOMERS

        We sell our oilfield products through our exclusive distributors to numerous end users, including BP, ChevronTexaco, El Paso Exploration, Anadarko Petroleum Corporation, Burlington Resources Inc., Apache Corporation and Exxon Mobil Corporation. We sell our finned and other heat recovery tube products to over 50 end users, including Foster Wheeler Corporation, Chicago Tube and Iron Company, Alstom Power, Cerrey, Nooter Eriksen, Inc., and Deltak, L.L.C. We sell our precision mechanical tubulars to such distributors and end users as Earle M. Jorgensen Company, Marmon/

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Keystone Corp., Hyva, DaimlerChrysler Corporation, American Axle & Manufacturing Holdings, Inc., Ford Motor Company, and Dana Corporation.

RESEARCH, DEVELOPMENT, INFORMATION TECHNOLOGY AND PATENTS

        We are committed to technologically innovative product development. With respect to oilfield products, we collaborate with customers and industry groups to develop new grades of oil country tubular goods as well as new products, such as expandable casing. Our expandable casing product was developed for a joint venture between Shell Oil Company and Halliburton Company and was first successfully installed in late 1999 in the Gulf of Mexico. By year-end 2002, there had been more than 100 successful installations totaling more than 100,000 feet of casing. We have also developed slotted tubes for expandable sand screens and riser sleeves to provide new product solutions for our customers. Our technical knowledge and high-performance casing products are also being applied in an innovative method for drilling wells using casing instead of drill pipe. We also have used our expertise to develop high-strength, thick wall line pipe for offshore applications. In addition, we developed ultrasonic testing methods to assure the quality of our tubing. In the specialty tubing area, our recent product developments include the Aeroseg finned tube, a new thermal mechanically processed Drawn Over Mandrel product called QDOM for applications requiring extreme mechanical properties and thick wall products using hot reduction technology for applications such as heavy axles that are normally made out of seamless tubes. We hold several United States patents covering some of our manufacturing processes and products.

        We also have invested in information technologies that provide the platform for internet-based commercial marketing and resource constrained production planning. We believe our information technologies capabilities will allow us to more profitably run our facilities, give our customers excellent service and facilitate web-based commercial initiatives.

MANUFACTURING CAPABILITIES

        We manufacture our oilfield products, precision mechanical tubulars, flat rolled steel and other products at our facilities located on an approximately 2,000-acre site we own in Lone Star, Texas which contains over 2,000,000 square feet of manufacturing space and approximately 91,000 square feet of oilfield products manufacturing facilities in Bellville, Texas. We manufacture our finned tubular products in approximately 364,000 square feet of manufacturing facilities on approximately 71.5 acres that we own or lease in the Tulsa, Oklahoma metropolitan area; Quebec, Canada; and Monterrey, Mexico. Our coupling products are manufactured at three owned facilities totaling 231,000 square feet of manufacturing space and located in Pine Bluff, Arkansas; Hughes Springs, Texas; and, Houston, Texas.

        The annual rated capacity of our facilities in Lone Star, Texas approximates 480,000 slab tons, 1,400,000 flat rolled tons and 1,000,000 welded pipe tons. We have access through marketing arrangements and alliances with mills for additional oilfield tubular capacity of approximately 500,000 tons per year. In 2002, the precision mechanical specialty tubing facilities operated at 74% of capacity. The rolling mills and pipe mills generally operated at 47% and 41% of capacity, respectively, while the electric arc furnaces ("EAF") generally operated at 35% of capacity.

        Wheeling operates 11 PMC high volume finishers and 20 state of the art CNC lathes at facilities in Pine Bluff, Arkansas, Hughes Springs, Texas and Houston, Texas. Wheeling also maintains finished product at its production facilities as well as warehouses at Steel, and a facility servicing U.S. Steel operated by Wheeling in Birmingham, Alabama. The Houston facility was established to handle premium threads, material that requires third party inspections and as an entry point into the oilfield accessories business. Wheeling offers a wide range of eight round and buttress couplings for 2³/8" tubing through 20" casing.

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        We have a major portion of the domestic manufacturing capacity for production of finned tubes for heat recovery applications. We also license technology relating to the production of finned tubular products to licensees in India, Italy, Japan and Korea.

RAW MATERIALS AND INVENTORY

        In general, we attempt to procure raw materials and to manage our finished goods inventory in a manner that will provide:

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significant flexibility in responding to the levels of demand for our various products;



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a short lead time in filling our customers' orders;



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the capacity to offer a broad product range; and



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the ability to offer our products at an effective cost.

        We generally produce oil country tubular goods and line pipe to fill specific orders and, accordingly, we maintain the majority of our inventory in the form of steel slabs, steel coils, work-in-process or finished goods earmarked for specific orders. Some work-in-process and finished goods inventories are maintained in order to provide flexibility in responding to customer delivery demands.

        We can use steel slabs, scrap steel and steel coils in the manufacture of our tubular products. We purchased steel slabs to meet approximately 70% of our steel needs in 2002, and it was often necessary for us to commit to purchase slabs 60 to 120 days prior to production. We anticipate again using steel slabs for most of our production needs in 2003. Our principal raw material for our internally produced steel slabs is scrap steel, which is internally generated from our operations or available in the spot market. The price of scrap steel and steel slabs can be volatile, is influenced by a number of competitive market conditions beyond our control and is not directly related to the demand for our products.

        In March 2002, the U.S. Government imposed tariffs over a three-year period on various types of imported steel, principally steel coil, but also including steel slabs. We procure a substantial portion of our steel slabs principally from Mexico. Mexico and Canada were excluded from these tariffs. In year one, a 30% tariff on countries other than Mexico and Canada that produce steel slabs is only imposed after an aggregate quota of 4.9 million tons is exceeded. In year two, a 24% tariff is imposed after a quota of 5.4 million tons is exceeded and, in year three, an 18% tariff is imposed once a quota of 5.8 million tons is exceeded. These actions have reduced foreign imports of steel coils and increased the cost of flat rolled steel, which is approximately 10%-15% of our steel requirements. In addition, higher steel coil costs resulted in increased demand for steel slabs. This increased demand caused prices for steel slabs to increase in the second half of 2002. Fourth quarter steel costs were 30% higher than in the first half of 2002. Higher steel costs are expected in 2003 as well.

        Raw materials for our specialty tubing products are readily available from multiple sources. Steel coils and wire rod are the primary raw materials used in the manufacture of our finned tubular products, and steel coils are the principal raw material used in the manufacture of our precision mechanical tubulars. We usually produce our specialty tubing products to meet specific orders and, accordingly, inventory is managed to minimize the amount of finished goods on hand. Work-in-process inventories are maintained in order to provide flexibility in responding to customer needs.

        We manufacture flat rolled steel primarily for use in producing oilfield and precision mechanical tubulars, but also for sale to third parties. We manufacture flat rolled steel using both purchased steel slabs and internally produced slabs.

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EMPLOYEES

        At December 31, 2002, we had a total of 1,900 active employees, of whom 929 were represented by four unions and five bargaining units. The majority of these union workers are represented by the United Steelworkers of America under a contract signed in June 2001, which expires on May 31, 2005. Two of the other agreements, covering an aggregate of 11 warehouse and plant security workers as of December 31, 2002, expire in July 2003 and September 2003, respectively. The remaining two collective bargaining agreements covered a total of 63 employees in Canada and Mexico as of December 31, 2002. Our management considers its relationship with our employees to be good.

        We have dedicated necessary resources and made the commitment to design and implement a health and safety program that will meet the Occupational Safety & Health Administration's (OSHA) Voluntary Protection Program (VPP) Star criteria at our facilities in Lone Star, Texas. The VPP safety management program goes beyond OSHA standards to protect workers more effectively than simple compliance. We plan to submit the VPP application to OSHA by the end of 2003.

FOREIGN OPERATIONS

        Our export sales to destinations outside the United States including finned tubulars and other heat recovery tubes were approximately $24.0 million in 2002, $45.3 million in 2001 and $47.2 million in 2000. We own a manufacturing facility in Quebec, Canada and entered into a lease of manufacturing facilities in Monterrey, Mexico that began operations in these countries in September 2000. Our export sales of $24.0 million to destinations outside the United States included $3.0 million from these foreign facilities in 2002.

ENVIRONMENTAL

        Our operations are subject to extensive environmental regulations with respect to air emissions, wastewater discharges, and waste management. Our environmental protection and improvement expenditures were approximately $3 million during the past three years, including expenditures related to asbestos abatement, secondary containment upgrades, PCB-contaminated electrical equipment elimination, waste disposal site closures and out-of-service facility remediation projects.

        In connection with the cleanup of several offsite commercial waste management sites, we, along with many other entities, have been designated a potentially responsible party (PRP) by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). CERCLA subjects PRPs to potential liability for such cleanup costs. Cost estimates have been obtained for each of the cleanup actions, and our share has been determined. Based upon these estimates, we do not believe our liability, individually or in the aggregate, will be material to our financial position and our results of operations.

        The waste units that received wastes defined as hazardous waste under the Resource Conservation and Recovery Act (RCRA) have been closed. The two RCRA units requiring continued monitoring are undergoing post-closure care. The remaining cost of post-closure care is estimated to be approximately $380,000. We have met our financial assurance requirements by demonstrating the company's ability to pay this amount. The Texas Commission on Environmental Quality (TCEQ), formerly the Texas Natural Resource Conservation Commission (TNRCC), is in the process of determining what, if any, corrective action is required to address the remaining non-RCRA solid waste management units.

        The TCEQ recently expressed interest in the regulatory status of the Specialty Tubing wastewater treatment facility at our Lone Star, Texas location. They have asked for information regarding the operation of the facility and our position regarding the applicability of an exemption from hazardous waste regulation. The TCEQ has also scheduled an inspection of the facility and related operations. We

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are cooperating fully with the TCEQ in that inquiry and submitting the information requested by the TCEQ.

        We possess necessary authorizations for air emissions, wastewater discharges and waste management. We are presently in substantial compliance with our permits and applicable air, water and waste management rules and regulations. We have an environmental management system in place to assist in maintaining compliance. In March 2002, we received formal certification that this system conformed to the internationally recognized ISO 14001:1996 standard. We do not expect future environmental expenditures necessary to comply with existing environmental rules and regulations to have a material impact on our financial position or operations.

INTERNET WEBSITE POSTINGS

        Our internet website is www.lonestartech.com. We make available through our internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

ITEM 2. PROPERTIES

        We manufacture our oilfield products, precision mechanical tubulars, flat rolled steel and other products at our facilities located on an approximately 2,000-acre site we own in Lone Star, Texas which contains over 2,000,000 square feet of manufacturing space. The original facilities, constructed in the 1940's and 1950's have been expanded and modernized, and include two EAFs equipped with oxy-fuel burners with a combined capacity of approximately 575,000 ingot tons per year; two rolling mills, a "two-high" mill that rolls the EAF ingots into slabs and a "four-high" single stand reversing Steckel mill that produces flat rolled coils; coil slitting and handling equipment; two pipe welding mills; seven draw benches, including the largest specialty tubing drawbench in the Western Hemisphere; three heat-treating facilities; numerous types of ultrasonic and electromagnetic testing and inspection equipment; finishing facilities at which oil country tubular goods are threaded and couplings are applied; and various support facilities including a shortline railroad and other transportation and storage facilities.

        Our annual rated capacity at our Lone Star, Texas facilities approximates 480,000 slab tons, 1,400,000 flat rolled tons, and 1,000,000 welded pipe tons. We have access through marketing arrangements and agreements with alliance mills to an additional oilfield pipe capacity of approximately 500,000 tons.

        We also have 91,000 square feet of oilfield products manufacturing facilities in Bellville, Texas. We manufacture our finned tubular products in approximately 364,000 square feet of manufacturing facilities on approximately 71.5 acres that we own or lease in the Tulsa, Oklahoma metropolitan area; Quebec, Canada; and Monterrey, Mexico. Our coupling products are manufactured at three owned facilities totaling 267,940 square feet of manufacturing, warehouse and office space and located in Pine Bluff, Arkansas on 12.7 acres; Hughes Springs, Texas on 19.4 acres; and Houston, Texas on 5.3 acres. Our headquarters are located in leased facilities in Dallas, Texas.

        We own 7,000 acres in Texas that was purchased primarily for iron ore, coal reserves, or water rights and mineral interests in an additional 12,000 acres in Oklahoma and 60,000 acres in Texas. No minerals have been recovered from these properties for many years because their use is no longer required in our operations. We own nominal oil and gas interests in an additional 18,000 acres in Texas.

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ITEM 3. LEGAL PROCEEDINGS

        On August 16, 2001, we entered into an agreement to purchase the assets of North Star Steel Company's Tubular Products Division. Consummation of the acquisition was subject to completion of financing arrangements. Due to lack of common stock financing which, along with certain debt financing, was required by the acquisition agreement to close the acquisition, we notified Cargill, Incorporated, the parent company of North Star Steel Company, on December 14, 2001, that we were not able to complete the acquisition. Later that day, Cargill, Incorporated notified us that it was filing a lawsuit against us seeking unspecified damages and alleging that we had breached the agreement. On March 13, 2003, the jury in Minnesota returned a verdict of $32 million in damages against Lone Star. We believe that we have fully performed all of our obligations under the acquisition agreement and will vigorously contest the verdict. We have set up a reserve of $32 million at December 31, 2002 related to the verdict.

        During the last four years, our subsidiary, Lone Star Steel Company (Steel), has been named as one of a number of defendants in 30 lawsuits alleging that certain individuals were exposed to asbestos on the defendants' premises. The plaintiffs are seeking unspecified damages. To date several of these lawsuits have been settled for approximately $30,000 in the aggregate. Of the 30 lawsuits, eight have been settled or are pending settlement and eight have been dismissed or are pending dismissal. We did not manufacture or distribute any products containing asbestos. Some or all of these claims may not be covered by our insurance. We have accrued for our estimated exposure to known claims, but do not know the extent to which future claims may be filed. Therefore, we cannot estimate our exposure, if any, to unasserted claims.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

        None.

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PART II

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

        Lone Star's Common Stock trades on the New York Stock Exchange under the symbol LSS. The following table summarizes the range of trading prices by quarter for the last two years:

        As of February 14, 2003, we had 3,063 common shareholders of record. We have not paid dividends on our common stock since becoming a public company and have no present plan to do so.

        Information required under this item with respect to beneficial owners of more than 5 percent of outstanding common stock, directors and executive officers and securities authorized for issuance under equity compensation plans is contained in Lone Star's proxy statement for the 2003 Annual Meeting of Shareholders, and is incorporated herein by reference.

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ITEM 6. SELECTED FINANCIAL DATA

⁽¹⁾

Includes Wheeling results of operations since the acquisition became effective on October 1, 2002.

⁽²⁾

Includes the results of operations of Fintube and Bellville since the acquisitions became effective on January 1, 2000 and April 1, 2000, respectively.

⁽³⁾

EBITDA is earnings before extraordinary items, interest, taxes, and depreciation and amortization. EBITDA is presented to help us describe our ability to generate income that can be used to service our debt. EBITDA is a non-GAAP liquidity measure commonly used in our industry and should not be considered as an alternative measure of our net income or cash flows from operations as computed in accordance with GAAP. Amounts presented may not be comparable to similar measures disclosed by other companies.

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

OVERVIEW

        We are a leading domestic manufacturer and marketer of premium welded oil country tubular goods, which are steel tubular products used in the completion of and production from oil and natural gas wells. We are also a major manufacturer of line pipe, which is used in the gathering and transmission of oil and natural gas. In addition, we are a leading manufacturer of specialty tubing products used in industrial, automotive, construction, agricultural and power technology applications. Effective January 1, 2000, we acquired the assets of Fintube Technologies, Inc. ("Fintube"), a leading manufacturer in specialty tubing including heat recovery finned tubes, which are used in various applications including fuel economizers, petrochemical plants, refineries and combined-cycle electrical power generation. On April 1, 2000, we also completed an acquisition of the assets of Bellville Tube Corporation ("Bellville"), a manufacturer of casing, tubing and line pipe for the oil and gas industry. On October 1, 2002, we acquired the majority of the assets of Wheeling Machine Products, Inc. and Wheeling Machine Products of Texas, Inc. (collectively, "Wheeling"), one of the largest domestic suppliers of couplings used to connect individual sections of oilfield casing and tubing.

        Manufacturing.    The manufacture of our products is capital intensive. Utilization rates at our manufacturing facilities in Lone Star, Texas increased through the first half of 2002 following a brief increase in the drilling rig count around April and then reduced significantly during the second half of the year as demand for our oilfield products declined with the general decrease in drilling, which was down 28% on average from the prior year with rig counts never rising above 875 during the last thirteen weeks of the year. Specialty tubing demand fell with the overall general decline in the domestic economy. Shipments of flat rolled steel were up slightly but any gains in volume were offset by decreases in average price. Overall, total shipment volumes were down 15% in 2002 over the prior year. The reduced production volumes negatively impacted the cost of our products sold throughout the year as fixed and semi-fixed costs were absorbed by fewer units produced. The level of production volume through our various facilities has a significant effect on the cost of manufacturing. Key variable costs include costs of labor and raw materials, including scrap steel, steel slabs, wire rod, steel coils, electricity and natural gas. Most of our finned tubes and other heat recovery products are manufactured in specific configurations as ordered. Accordingly, our manufacturing costs are to some extent factored into product prices on an order-by-order basis.

        We have entered into marketing alliances and manufacturing arrangements with several companies. These alliances and arrangements involve the marketing of their products which provide us access to additional manufacturing capacity. In addition, we have manufacturing technology licensees in India, Italy, Japan and Korea.

        Historically, our oilfield products have accounted for the majority of our total revenues. For fiscal year 2002, they were 58% of total revenues. As a result, our revenues are largely dependent upon the state of the oil and gas industry, which has historically been volatile. A general downturn in the oil and gas markets that began in the second half of 2001 and geopolitical instabilities in various parts of the world caused demand for our principal products to decrease. Accordingly, our historical operating results have fluctuated based on the demand for our products. Our future operating results may fluctuate significantly depending upon a number of factors, including industry conditions, the level of oil and gas drilling activity and competition from imports. Our finned tubular products are affected by the level of domestic and foreign demand for power generation as well as domestic and foreign competition.

        Oilfield Products.    Our oilfield products consist of (1) casing, which acts as a structural retainer wall in oil and natural gas wellbores, (2) production tubing, which transmits hydrocarbons to the

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surface, (3) line pipe, which is used in gathering and transmitting hydrocarbons, and (4) couplings, which are used to connect individual sections of oilfield casing and tubing.

        Demand for our oilfield products depends primarily upon the number of oil and natural gas wells being drilled, completed and re-worked and the depth and drilling conditions of these wells. The level of these activities depends primarily on natural gas and oil prices and industry expectations as to future prices. According to Baker Hughes rig counts, average domestic drilling activity decreased in 2002 to 830 rigs, or by 28% compared to the previous year. Further, distributors chose to fulfill a greater percentage of requirements out of existing inventories during the fourth quarter 2002. We expect demand for our oilfield products to increase throughout 2003 as the trend of higher oil and gas prices should result in an increase in the number of active drilling rigs and inventory levels at our distributors have been reduced. The EIA reports that the average West Texas Intermediate (WTI) crude oil price increased by $3.50 to $33 per barrel from December 2002 to January 2003. The spot price of natural gas at the Henry Hub rose above $6.00 per million btu late in January of 2003. Spot prices have been consistently above $5.00 per million btu as gas in underground storage has been significantly reduced compared to the levels of one year ago. The EIA further estimates that high natural gas prices and strong near-term demand pressures will drive drilling activity and well completions to very robust levels in 2003 and 2004. We believe that these are positive indicators of increased demand for our oilfield products in 2003.

        Specialty Tubing Products.    Our specialty tubing product segment includes finned tubular products and precision mechanical tubulars. Our precision mechanical tubulars consist of a wide array of high-quality, custom-made steel tubular products with precise dimensional control and special metallurgical properties which are manufactured by the "Drawn Over Mandrel" process. This process allows us to achieve higher critical tolerances and dimensional control than other processes. These products are used for several industrial applications, including the manufacture of hydraulic cylinders for construction and farm equipment; automotive applications, such as stabilizers and intrusion tubes; and other uses, including machine parts, bearing races, down-hole pump barrels, heavy-lift crane boom chords, drill rods and liner hangers.

        Demand for precision mechanical tubulars within the traditional markets was down in 2002 due to the economic slowdown, particularly in the industrial sector. We believe that demand for our precision mechanical tubing products in 2003 will continue to be unfavorably impacted until the general economy recovers.

        Our finned tubular products are used in heat recovery applications such as fuel economizers, petrochemical plants, refineries and combined-cycle electrical power generation plants. Demand for finned tubulars and related products was down throughout 2002 as a result of curtailed and cancelled power plant construction projects related to the general slowdown in the economy and lack of affordable capital for these projects. With few exceptions, demand for new power plant construction projects is not likely to return in the near term until existing capacity is utilized. However, the EIA reports that the natural gas share of electricity generation is projected to increase from 17 percent in 2001 to 29 percent in 2025. Finally, our finned tubular business has been reorganized around new marketing and commercial business lines directed at more traditional heat recovery markets including fuel economizers, where demand typically increases with higher natural gas and oil prices, and refineries, where demand typically should increase from facilities that will be retrofitted to comply with new Federal regulations for lower sulphur content of gasoline and diesel fuel in 2004 and 2005.

        Flat Rolled Steel and Other Products.    We manufacture and market flat rolled steel, which is primarily used in the manufacture of our oil country tubular products. We also sell flat rolled steel to fabricators of large-diameter transmission pipe, storage tanks, rail cars and a variety of other construction and industrial products. Our other products are principally used for structural and piling

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applications in the construction industry. We sell flat rolled steel directly to end-users and through service centers primarily in the Southwestern region of the United States.

        We sell flat rolled steel in highly competitive markets, with price, quality and availability primarily determining customer purchase decisions. During the first half of 1999, the United States government established antidumping duties and quotas for flat rolled steel suppliers from certain foreign countries which initially served to reduce the amount of imported foreign steel coils. During 2001, imports of low priced flat rolled steel increased throughout the year reducing our revenues from flat rolled steel by 40% in the fourth quarter compared to the first quarter of 2001. This surge of low priced imports was in part the cause for bankruptcies of several domestic steel mills. In March 2002, significant tariffs on imported products from all foreign countries other than Canada and Mexico were imposed, which will last for up to three years. Revenues from flat rolled steel and other tubular products were essentially flat in 2002 compared to 2001. Although tons shipped increased 6%, the volume increase was offset by lower average prices.

        We sell thin strip steel directly to end users in North America through a small sales force. Flat rolled steel processing services are also sold to steel mills where we receive processing revenues but do not take title to the steel.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's Discussion and Analysis, Historical Results of Operations and Financial Condition are based on the related consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Lone Star evaluates its estimates primarily based on historical experience and business knowledge. These estimates are evaluated by management and revised as circumstances change. A discussion of the significant estimates made by Lone Star follows:

Warranty Claims

        Our products are used in applications which are subject to inherent risks including well failures, performance deficiencies, line pipe leaks, personal injury, property damage, environmental contamination or loss of production. We warrant our products to meet certain specifications. Actual or claimed deficiencies in meeting these specifications may give rise to claims. We maintain a reserve for asserted and unasserted warranty claims. The warranty claim exposure is evaluated using historical claim trends and information available on specifically asserted claims. We also maintain product and excess liability insurance subject to certain deductibles that limits our exposure to these claims. We consider the extent of insurance coverage in our estimate of the reserve. Typically, this reserve is not subject to significant fluctuations from period to period. However, the incurrence of an unusual amount of claims could alter our exposure and the related reserve.

Bad Debts

        Our customers are concentrated in markets and industries that are subject to volatility. In addition, we sell a substantial amount of products to a few customers. We maintain a reserve for known and unknown bad debts. We evaluate credit risk and the adequacy of our reserve by monitoring the age of our accounts receivable and the credit worthiness of our customers. In addition, we monitor the overall status of the industries where our products and services are utilized. Typically, this reserve is not subject to significant fluctuations from period to period. However, the incurrence of an unusual amount of bad debt could alter our exposure and the related reserve.

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Environmental Obligations

        Our business is subject to numerous environmental regulations. We are actively remediating a few known exposures and conducting post closure monitoring activities. Our environmental department monitors the status of our environmental exposures and compliance with regulations through various means. We maintain an environmental reserve to cover the costs of expected remediation and post closure monitoring. We estimate the range of cost for the remediation and post closure based on historical experience, results of monitoring and the known extent of exposure. We evaluate the range of exposure and record the reserve at the most probable amount within that range. Typically, this reserve is not subject to significant fluctuations from period to period; although given the nature of environmental exposure, significant changes in the reserve are possible.

Revenue Recognition

        Product revenues are recognized as sales when revenue is earned and is realized or realizable. This includes satisfying the following criteria: the arrangement with the customer is evident, usually through the receipt of a purchase order; the sales price is fixed or determinable; delivery has occurred, which may include delivery to the customer storage warehouse location at one of our subsidiaries in which instance, the risk of loss has been passed to the customer; and collectibility is reasonably assured. Freight and shipping that is billed to customers is included in net sales, and the cost of shipping is included in cost of sales. We have marketing agreements to sell steel oilfield tubular products manufactured by other companies. Revenue is recorded on a gross basis for certain transactions with alliance mills when we are the primary obligor and we have general inventory and credit risk, and certain other transactions are recorded net.

Impairment of Long-Lived Assets

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

HISTORICAL RESULTS OF OPERATIONS

        Our revenues are derived from three business segments: oilfield products, specialty tubing products and flat rolled steel and other products and services.

        In the last three years, segment revenues were as follows:

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        Shipments of products by segment were as follows:

2002 Compared With 2001

        Net revenues of $523.7 million for the year ended December 31, 2002 were down 19% from 2001. Oilfield products revenues decreased by $97.7 million, or 24%, to $304.2 million, and shipment volumes were off by 21% from the prior year. Demand for oilfield products is generally correlated to the number of rigs drilling. There were 830 average active rigs in 2002 compared to 1,156 in 2001, a decrease of 28%. Drilling activity decreased steadily through the first quarter of 2002 and although the average domestic rig count for the second quarter of 2002 was slightly lower than for the first quarter, it did increase by nearly 100 rigs from the low of 738 rigs at the beginning of April according to Baker Hughes. However, after the 100 rig increase, the average domestic rig count remained flat through the third quarter and ended the year at an average of 830 active domestic rigs. Although average oilfield product prices were up slightly over 2001, the increases were exclusive to the first three quarters of 2002 as average oilfield product prices declined 6% from the third quarter 2002 to the fourth quarter due principally to a higher percentage of lower priced line pipe and carbon-grade OCTG in the product mix.

        Specialty tubing product revenues decreased in 2002 to $157.8 million, a 16% decline from 2001 revenues of $187.7 million due primarily to the general decline of economic conditions during 2002. Revenues from heat recovery tubular goods and related products were down 40% from 2001 to $51.4 million as a result of delays and cancellations in power plant construction projects. Precision mechanical tubulars accounts for approximately 54% of the total specialty tubing segment and shipments were up in 2002 to 79,321 tons, or 6% over the prior year. However, the volume increase was offset by a slight decline in average price resulting in a 6% increase in precision mechanical tubular revenues.

        Flat rolled steel and other tubular products revenues were up 2% to $61.7 million. This increase is attributable to continued improvements in the U.S. steel markets as indicated by a 6% increase in tons shipped over 2001, offset by a decrease in average selling prices. Lower average prices were due to the sale of excess steel coils at Fintube and a higher mix of lower priced products in this segment.

        Gross profit for 2002 was $7.4 million compared to $69.3 million in 2001. This decrease is primarily due to higher unit costs associated with decreased production volumes, increases in steel costs and reduced overall revenues from oilfield and specialty tubing products. Steel costs, which comprise approximately 55% of our total cost of sales, were relatively stable during 2001 but increased nearly 30% in the fourth quarter 2002 from the first half of 2002. These higher steel costs contributed to a significant reduction in gross margins and operating losses in the third and fourth quarters of 2002 as compared to 2001.

        Selling, general, and administrative expenses increased significantly in 2002 by $33.1 million, or 92% to $69.2 million compared to $36.1 million in 2001. The increase is attributable to a $32 million charge incurred as a result of a jury verdict against Lone Star on March 13, 2003—see Item 3, Legal Proceedings. The remaining difference relates to significant adjustments to our staffing including employment reductions of approximately 15% before acquisitions, or approximately $3.4 million, offset

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by increases in selling costs of approximately $0.8 million, increase in healthcare costs of approximately $1.4 million, increase in acquisition-related costs of approximately $0.8 million, and increase in professional fees of approximately $1.2 million.

        Interest income decreased slightly in 2002 to $2.5 million from $2.9 million in 2001 due to lower average interest rates on invested cash.

        Interest expense consists of interest on the $150 million, 9% senior subordinated notes less amounts capitalized. Interest expense decreased slightly in 2002 to $12.7 million from $12.8 million in 2001 due principally to greater interest capitalization in 2002 versus 2001.

        Income tax benefit.    Lone Star's effective tax rate is affected by the carryforward of net operating losses ("NOL") recognized or not recognized in a particular year and the full valuation allowance placed against its net deferred tax assets. In 2002, the tax benefit at the U.S. statutory rate of 35% was reduced by $24.5 million of NOL benefit not recognized in the current period as management believes that it is more likely than not the related tax benefits would not be realized. The ultimate realization of our deferred tax assets depends upon our ability to generate sufficient taxable income in the future. Accordingly, due to the uncertainty regarding possible utilization of NOLs and the sensitivity of our earnings to the level of domestic drilling activity, we record a valuation allowance to fully reserve the computed net deferred tax assets. The income tax benefit for the year ended 2002 primarily consists of the recognition of state income tax benefits.

2001 Compared With 2000

        Net revenues of $650.2 million for the year ended December 31, 2001 were 1% higher than in 2000. Revenues from oilfield products rose 11% to $401.9 million from 2000 on 12% higher shipment volumes. Demand for oilfield products increased during the first half of 2001 due to a consistent increase in drilling activity, with the active rig count rising from 1,114 at the end of 2000 to 1,275 at the end of the second quarter of 2001. However, from the end of the second quarter of 2001 to the end of the year, the active rig count declined 30%, significantly reducing demand for and revenues from our oilfield products in the second half of the year.

        Specialty tubing product revenues decreased in 2001 by 15% from $220.9 million in 2000 to $187.7 million in 2001. Revenues from precision mechanical tubing products were down due to reduced industrial activity associated with slower general economic conditions. Revenues from these products were particularly weak following events of September 11^th as revenues dropped 28% from the third quarter of 2001 to the fourth quarter of 2001. Likewise, revenues from specialty finned tubulars and related products fell 9% in the fourth quarter of 2001 following the cancellation and curtailment of some power plant construction projects.

        Flat rolled steel and other tubular products were down 3% from 2000 to $60.6 million in 2001, due to a 3% decrease in shipment volumes and unchanged prices due to reduced industrial demand. Shipments decreased throughout the year as imports steadily increased.

        Gross profit for 2001 decreased 19% to $69.3 million. Gross profit was down although revenues were 1% higher than 2000 due to significantly reduced production volumes in the second half of 2001, which caused fixed and semi-fixed cost to be absorbed in less units of production. Unit costs were particularly high in the fourth quarter as shipment volumes were down substantially in our three business segments due to the further slowdown in the economy after September 11^th.

        Selling, general, and administrative expenses were $36.1 million in 2001 compared to $33.7 million in 2000. This was due to increased expenses associated with high sales volumes in the first half of 2001 and severance costs related to workforce reductions associated with the business downturn in the second half of 2001.

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        Interest income increased in 2001 to $2.9 million from $2.0 million in 2000 due to higher cash balances resulting from $50.8 million in proceeds from the sale of common stock in April of 2001 and $150 million in proceeds from sale of bonds in May of 2001, partially offset by lower average interest rates.

        Interest expense decreased from $14.4 million in 2000 to $12.8 in 2001 primarily due to lower interest rates.

        Other expense, net of $5.5 million was primarily related to a one-time charge of $5.0 million for the write-off of acquisition related expenses and financing costs associated with the uncompleted acquisition and $0.8 million charge to income from the settlement of our interest rate swap upon early retirement of debt.

        Income before extraordinary items was $17.0 million compared to $38.6 million due to lower gross margins in the second half of 2001 resulting from significantly lower production volumes and the $5.0 million write-off of acquisition and financing costs associated with the uncompleted acquisition.

        Extraordinary loss of $0.6 million for 2001 was due to early retirement of debt associated with the extinguishment of a bank credit facility using proceeds from the sale of stock and bonds.

FINANCIAL CONDITION AND LIQUIDITY

        As of December 31, 2002, we had $120.5 million in cash and cash equivalents and $281.9 million in working capital.

        Cash provided by (used in) operating activities was ($12.4) million, $31.3 million and ($8.6) million for 2002, 2001 and 2000, respectively. Cash from operations in 2002 decreased principally due to the net loss of $69.2 million, offset by reduced accounts receivable and investment in inventories, and lower payments on accounts payable and accrued liabilities. Days sales outstanding was 42 days at the end of 2002, compared to 40 days at the end of 2001 and 54 days at the end of 2000. Excluding our acquisition of Wheeling, inventories were reduced in 2002 by $6.4 million in response to the general decline in the domestic U.S. economy including the associated decrease in demand for oilfield and heat recovery products. Cash from operations in 2001 increased due to higher sales. Cash used by operating activities in 2000 was attributable to increased accounts receivable and the increase in inventories associated with higher oilfield products shipments.

        Cash used in investing activities was $54.0 million, $14.7 million and $96.6 million for 2002, 2001 and 2000, respectively. Cash used in 2002 relates to our acquisition of Wheeling and capital expenditures to improve the efficiencies and effectiveness of our production capabilities and to install new computer-based enterprise resource planning systems. Cash used in 2001 primarily relates to higher capital expenditures to expand our finned tubular products capacity in Mexico and Canada and to install new computer-based enterprise resource planning systems. Cash used in 2000 relates to our acquisitions of Fintube and Bellville and capital expenditures.

        Cash provided by financing activities was $81.5 million, $63.2 million and $109.7 million in 2002, 2001 and 2000, respectively. Cash provided in 2002 relates to proceeds from the offering of 3.3 million shares of Lone Star common stock totaling $82.8 million offset by $1.3 million purchase of treasury shares. Cash provided by financing activities in 2001 was generated from the proceeds of the sale of $150 million senior subordinated notes and $50.8 million of common stock, offset by repayments on the revolving credit facilities and term loans. Cash provided by financing activities in 2000 was primarily attributable to borrowings to finance the Fintube and Bellville acquisitions and higher borrowings to fund additional working capital to meet the increased demand for oilfield products.

        On April 23, 2002, Lone Star sold 3.3 million shares of common stock under a previously filed universal shelf registration statement. Proceeds to Lone Star were $82.8 million. Lone Star intends to

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use the remaining net proceeds from this sale to acquire other complementary businesses such as Wheeling or to make compatible asset investments and provide funds for working capital and other general corporate purposes.

        On October 16, 2002, Lone Star filed a universal shelf registration statement to sell from time to time up to a total of $136.0 million of debt securities, preferred stock, common stock, depository shares and warrants. Once this registration statement is effective, Lone Star will have an aggregate of approximately $250.0 million of registered securities available, including a previously filed universal shelf registration statement. Also, on October 16, 2002, Lone Star's Board of Directors authorized the open-market purchase of Lone Star's common stock from time to time for a total investment not to exceed $10.0 million. As of December 31, 2002, the Company has 105,844 treasury shares at a cost of $1.3 million.

        On May 29, 2001, we issued $150.0 million 9% senior subordinated notes due June 1, 2011 to qualified institutional buyers. Interest on the outstanding senior subordinated notes accrues at a rate of 9% per year, payable semi-annually in arrears on each June 1 and December 1, commencing December 1, 2001. We used the proceeds received from the senior notes to pay down the revolving lines of credit, term loans, slab consignment obligations and for general corporate purposes. The notes are fully and unconditionally guaranteed by each of our current and future domestic restricted subsidiaries.

        On May 2, 2001, we sold 1.2 million shares of our common stock under a previously filed universal shelf registration statement. The proceeds to us were $50.8 million. Proceeds of the sale were used to extinguish debt associated with credit facilities at our subsidiaries, Lone Star Steel Company (Steel) and Fintube Technologies, Inc. (Fintube), and for general corporate purposes.

        In October 2001, Lone Star and its domestic subsidiaries entered into a three-year $100 million senior secured credit facility for use by Lone Star and our domestic subsidiaries. Borrowings from this facility can be used for general corporate purposes. Under this credit facility, we can borrow an amount based on a percentage of eligible accounts receivable and inventories reduced by outstanding letters of credit. The availability under this facility was $97.9 million at December 31, 2002. Borrowings under this credit facility are collateralized by substantially all of the Company's assets, other than real estate. At our option, the interest rate is the prime lending rate or the LIBOR plus the applicable additional interest. As a result, we will be subject to interest rate risk if we borrow under the credit facility. At December 31, 2002, no amount was outstanding under this credit facility.

        In September 2002, the $100 million credit facility was amended and restated which modified certain financial covenants. For 2002, we are in compliance with the facility's covenants and we do not anticipate non-compliance in the foreseeable future.

        In 2000, Fintube had a senior credit facility providing a $20 million revolving line of credit and a $39 million term loan used to pay part of the cash portion of the purchase price in the Fintube acquisition. In August 2001, the Fintube credit facility was paid in full early and terminated, resulting in the write off of $0.6 million in deferred financing costs as an extraordinary item. In addition, we terminated an interest rate swap agreement related to the Fintube credit facility. The settlement of the interest rate swap resulted in a $0.8 million charge included in other expenses.

        We operate in capital intensive businesses. We have made, and we expect we will be required to make, significant capital expenditures each year for recurring maintenance necessary to keep manufacturing facilities operational, to comply with environmental and other legal requirements and to improve our information systems. Additionally, we regularly make capital expenditures for technological improvements and for research and development projects. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business

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opportunities or respond to competitive pressures. Our capital expenditures budget for 2003 is approximately $9 million to $12 million.

        We require capital primarily to fund general working capital needs and capital expenditures. Principal sources of funds include cash and cash equivalents, cash generated from operations and borrowings under our credit facility. We believe these sources of funds will provide the liquidity necessary to fund our cash requirements during 2003.

        Our operations are subject to environmental compliance and permitting requirements of various foreign, federal, state and provincial governmental agencies. We believe that the cost of maintaining compliance with environmental requirements will fall within our contemplated operating and capital expenditure plans, averaging $1.0 million to $2.0 million annually in the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

        At December 31, 2002, we had contractual cash obligations to repay debt, to make payments under leases, purchase obligations and commercial commitments in the form of unused lines of credit. Payments due under these long-term obligations are as follows:

        Commercial commitment expirations are as follows:

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," ("SFAS No. 143"). SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to all entities and legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and are subsequently allocated to expense over the asset's useful life. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The provisions of SFAS No. 143 are not expected to have a material impact on Lone Star's consolidated financial statements.

        In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144"). SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived

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assets to be disposed of. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," however, this statement retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement also supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for segments of a business to be disposed. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The provisions of SFAS No. 144, which the Company adopted in 2002, did not have a material impact on Lone Star's consolidated financial statements.

        The FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," ("SFAS No. 145") in April 2002 and is effective for fiscal years beginning after May 15, 2002. SFAS No. 145 amends existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Upon adoption of SFAS No. 145 in 2003, the extraordinary loss recorded in 2001 will be reclassified as other expense.

        The FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," ("SFAS No. 146") in June 2002. SFAS No. 146 replaces current accounting literature and requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, with earlier application encouraged. The provisions of SFAS No. 146 are not expected to have a material impact on Lone Star's consolidated financial statements

        In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of this interpretation are effective for interim and annual periods after December 15, 2002. The initial recognition and initial measurement requirements of this interpretation are effective prospectively for guarantees issued or modified after December 31, 2002. The interpretation's expanded disclosures will not have a material impact on our financial position or results of operations. We are assessing, but at this point do not believe the adoption of the recognition and initial measurement requirements of this interpretation will have a material impact on our financial position or results of operations.

        In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123," ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for financial statements issued for fiscal years ending after December 15, 2002. We have adopted the disclosure provisions of SFAS No. 148. We have not elected to make a voluntary change to the fair value based method of accounting for stock-based compensation.

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        In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities." This interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," addresses consolidation by business enterprises of variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. This interpretation defines the concept of "variable interests" and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risks among the parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. We have not completed our assessment as to whether or not the adoption of this interpretation will have a material impact on our financial position or results of operations.

FORWARD-LOOKING INFORMATION

        The statements included in this Annual Report regarding future financial performance and results and the other statements that are not historical facts are forward-looking statements. The words "believes," "intends," "expects," "anticipates," "projects," "estimates," "predicts," and similar expressions are also intended to identify forward-looking statements. Such statements involve risks, uncertainties and assumptions, including, but not limited to, industry and market conditions, environmental liabilities, competitive pricing, practices and conditions, availability and pricing of raw materials, fluctuations in prices of crude oil and natural gas, the trade environment, the impact of current and future laws and governmental regulations (particularly environmental laws and regulations) and other factors discussed in this Annual Report and in other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to certain risks associated with the change in foreign currency rates, interest rates and commodity prices. We seek to minimize the potential adverse impact of those market risks through the use of appropriate management techniques including the limited use of derivative financial instruments.

        Our operations in Mexico and Canada are accounted for in the local currencies, converted to the U.S. dollar equivalent based on published exchange rates for the period reported and are therefore subject to risk of exchange rate fluctuations. We believe that our current risk exposure to exchange rate movements is not significant.

        Our investments in cash equivalents, the weighted average maturity of which is less than one year, are subject to interest rate risk. The value of these securities would decline in the event of increases in market interest rates. We manage this risk by investing in securities with short-term maturities and varying maturity dates. In addition, we intend to hold these securities until maturity and, as a result, avoid the losses resulting from sudden changes in interest rates.

        To the extent that we borrow against our credit facility, we are exposed to interest rate risk arising from the variable-rate nature of the facility. There were no borrowings on this facility at December 31, 2002. In the past, we have used interest rate swaps to effectively fix a portion of the interest rates on our variable rate credit facilities. We did not have any interest rate swaps at December 31, 2002. Our senior subordinated notes accrue interest at a fixed rate of 9%. The fair value of the notes is sensitive to changes in interest rates. The fair value of Lone Star's senior subordinated debt based on quoted market prices was $137.4 million and $126.0 million at December 31, 2002 and 2001, respectively.

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        We are subject to commodity price risk, primarily with respect to purchases of steel and natural gas. Purchased steel represents a significant portion of our cost of goods sold. As a result, fluctuations in the cost of purchased steel, which can be volatile and cyclical in nature, have a significant impact on our margins both positively and negatively. We purchase natural gas for our operations and therefore have a limited market risk in natural gas prices. As a result, our earnings could be affected by changes in the price of natural gas. As market conditions dictate, we may enter into contracts to acquire a significant portion of our natural gas requirements over periods ranging from six to eighteen months. Our remaining requirements are purchased on the market at the current value.

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of Lone Star Technologies, Inc. and subsidiaries (the "Company"):

        We have audited the accompanying consolidated balance sheet of Lone Star Technologies, Inc. and its subsidiaries as of December 31, 2002, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. The financial statements of Lone Star Technologies, Inc. as of December 31, 2001, and for the years ended December 31, 2001 and 2000 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 22, 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 audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.

        In our opinion, such 2002 financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries at December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Note C to the financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142.

        As discussed above, the financial statements of Lone Star Technologies, Inc. as of December 31, 2001, and for the years ended December 31, 2001 and 2000 were audited by other auditors who have ceased operations. As described in Note C, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets", which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note C with respect to 2001 and 2000 included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense recognized in those periods related to goodwill, and intangible assets that are no longer being amortized as a result of initially applying Statement No. 142 (including any related tax effects) to the Company's underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings-per-share amounts.

        As presented in Note L, the Company changed the disclosure of its condensed consolidating financial information relating to guarantor and nonguarantor subsidiaries for 2001 and 2000 to present a separate column for the nonguarantor subsidiary. In the previously issued financial statements the nonguarantor and guarantor subsidiaries were included in a single column titled "subsidiaries". Our procedures with respect to the disclosures for guarantor and nonguarantor subsidiaries for 2001 and 2000 included (i) agreeing the newly presented column for the nonguarantor subsidiary to audited stand-alone financial statements of the subsidiary and (ii) testing the mathematical accuracy of the adjusted guarantor subsidiaries column by subtracting the amounts determined in (i) from the amounts included in the subsidiaries column in the previously issued financial statements. The financial statements of the nonguarantor subsidiary for the years ended December 31, 2001 and 2000 were

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audited by other auditors who expressed an unqualified opinion on those financial statements in their report dated January 17, 2002.

        In our opinion, the disclosures and adjustments for 2001 and 2000 in Notes C and L are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such disclosures and adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

DELOITTE & TOUCHE LLP

Dallas, Texas
March 13, 2003

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholder of Aletas y Birlos Mexicana, S.A. de C.V. and Subsidiary:

        We have audited the consolidated balance sheet of Aletas y Birlos Mexicana, S.A. de C.V. and subsidiary as of December 31, 2001 and the related statements of income, shareholders' equity, and cash flows for the years ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with generally accepted auditing standards in the United States of America. 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 Aletas y Birlos Mexicana, S.A. de C.V., and subsidiary at December 31, 2001, and the consolidated results of their operations and their cash flows for the years ended December 31, 2001 and 2000 in conformity with generally accepted accounting principles in the United States of America.

BDO-HERNANDEZ MARRON Y CIA., S.C.

Veracruz, Veracruz, Mexico
January 17, 2002

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THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP NOR HAS ARTHUR ANDERSEN LLP PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THIS FORM 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Lone Star Technologies, Inc. (Lone Star):

        We have audited the accompanying consolidated balance sheets of Lone Star (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements and the schedules referred to below are the responsibility of Lone Star's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

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

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lone Star and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

        Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the index to consolidated financial statements are presented for the purpose of complying with the Securities and Exchange Commission's rules and are not a part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Dallas, Texas,
January 22, 2002

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LONE STAR TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

($ and shares in millions, except per share data)

See Notes to Consolidated Financial Statements.

35

LONE STAR TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

($ in millions, except share data)

See Notes to Consolidated Financial Statements.

36

LONE STAR TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

See Notes to Consolidated Financial Statements.

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LONE STAR TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

($ in millions)