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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

For the transition period from                          to                         

VARCO INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (281) 953-2200

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, as of the registrant’s most recently completed second fiscal quarter, was $1,820,227,284 based on the closing sales price of such stock on such date.

The number of shares outstanding of the registrant’s common stock, as of February 20, 2004 was 97,173,094.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2004 Annual Meeting are incorporated by this reference into Part III, as set forth herein.

ITEM 1.     BUSINESS

General

Varco International, Inc. (“Varco” or the “Company”) is a leading provider of highly engineered drilling and well-servicing equipment, products and services to the world’s oil and gas industry. With operations in over 350 locations in over 40 countries across six continents, the Company manufactures and supplies innovative drilling systems and rig instrumentation; performs inspection and internal coating of oilfield tubulars; provides drill cuttings separation, management and disposal systems and services; and manufactures coiled tubing, wireline, and pressure control equipment for land and offshore drilling and well stimulation operations. The Company also manufactures coiled tubing, provides in-service pipeline inspections, manufactures high pressure fiberglass and composite tubing, and sells and rents advanced in-line inspection equipment to makers of oil country tubular goods. The Company has a long tradition of pioneering innovations which improve the efficiency, safety, cost and environmental impact of petroleum operations.

The Company’s common stock is traded on the New York Stock Exchange under the symbol “VRC.” The Company operates through four business groups: Drilling Equipment Group, Tubular Services, Drilling Services, and Coiled Tubing & Wireline Products.

The Drilling Equipment Group manufactures and sells integrated systems and equipment for rotating and handling pipe on offshore and land drilling rigs, including conventional drilling rig tools and equipment; pipe handling tools; hoisting and rotary equipment; pressure control and motion compensation equipment; and flow devices. The group also provides after-market service and sales of spares parts for its drilling equipment. Customers include onshore and offshore drilling contractors, major oil and gas companies, independent producers, national oil companies, and oilfield distributors.

The Tubular Services group provides internal coating products and services, inspection services, and quality assurance services for oil country tubular goods. Oil country tubular goods (“OCTG”) include drill pipe, tubing, casing and flowlines. Additionally, this group sells and rents proprietary equipment used to inspect tubular products at steel mills, and designs, manufactures and sells corrosion-resistant high pressure fiberglass and composite tubular goods for both oilfield and industrial applications. The Tubular Services group also provides technical inspection services and quality assurance services for in-service pipelines used to transport oil and gas. Customers include major oil and gas companies, independent producers, national oil companies, drilling contractors, oilfield supply stores, industrial plant operators, pipeline operators, and steel mills.

The Drilling Services group sells and rents technical equipment used in, and provides services related to, the separation and management of drill cuttings (solids) from fluids used in the oil and gas drilling process (“Solids Control”). The Drilling Services group also sells and rents data collection and monitoring systems used to manage the drilling process on site (“Rig Instrumentation”). Customers include major oil and gas companies, independent producers, national oil companies, drilling fluids providers and drilling contractors.

The Coiled Tubing & Wireline Products group designs, manufactures, and sells highly-engineered coiled tubing, coiled tubing units and related equipment as well as pressure control equipment and equipment used in pressure pumping and wireline operations. These products are used in oil and gas well drilling, completion and remediation operations. Customers include oil and gas coiled tubing service companies, pressure pumping companies, national oil companies as well as major oil companies and independent producers.

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

The Company’s principal executive offices are located at 2000 West Sam Houston Parkway South, Suite 1700, Houston, Texas 77042, its telephone number is (281) 953-2200, and its Internet web site address is http://www.varco.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, are available free of charge on its Internet website. These reports are posted on its website as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission (SEC).

The Company has included a glossary of technical terms at the end of Item 1 of this Annual Report.

Influence of Oil and Gas Activity Levels on the Company’s Business

The oil and gas industry in which the Company participates has historically experienced significant volatility. Demand for the Company’s services and products depends primarily upon the general level of activity in the oil and gas industry worldwide, including the number of drilling rigs in operation, the number of oil and gas wells being drilled, the depth and drilling conditions of these wells, the volume of production, the number of well completions and the level of well remediation activity. Oil and gas activity is in turn heavily influenced by, among other factors, oil and gas prices worldwide. High levels of drilling and well-remediation activity generally spur demand for the Company’s products and services used to drill and remediate oil and gas wells. Additionally, high levels of oil and gas activity increase cash flows available for drilling contractors, well-remediation service companies, and manufacturers of oil country tubular goods to invest in capital equipment which the Company sells.

Approximately 51% of the Company’s Drilling Equipment Group business group’s revenues are determined by the capital expenditures of drilling contractors and oil companies on equipment for new drilling rig fabrication or drilling rig refurbishment projects. Capital expenditures are influenced by cash flows these contractors generate from drilling activity, but also by the availability of financing, the outlook for future drilling activity, and other factors. Generally the Company believes the demand for more drilling capital equipment lags increases in the level of drilling activity. Approximately 49% of the Drilling Equipment revenue in 2003 was related to the sale of drilling equipment spare parts and consumables, the provision of equipment-repair services, and the rental of drilling equipment, which the Company believes are generally determined directly by the level of drilling activity.

The majority of the Company’s Tubular Service business group revenues are directly related to the level of demand for oil country tubular goods, which is determined by the level of drilling and well remediation activity (which consume oil country tubular goods). A portion of Tubular Services sales are related to (1) demand for pipeline inspections, which is generally unrelated to drilling or well remediation activity and may be adversely affected by high commodity prices when operators defer inspections; (2) the sale of fiberglass and composite tubing to industrial customers, which is generally unrelated to drilling or well remediation activity but may be tied somewhat to oil and gas prices; and (3) the sale of capital equipment inspection to the manufacturers of oil country tubular goods, which is indirectly related to drilling activity, in the Company’s view.

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The Company’s Drilling Services business group revenues are closely tied to drilling activity, although a portion (approximately 13%) of Drilling Services revenues are related to the sale of capital equipment to drilling contractors, which is indirectly related to the level of drilling activity. The Company’s Drilling Services sales of consumables, such as shaker screens, and spare parts for its equipment, are generally determined directly by the level of drilling activity in the Company’s view.

The Company’s Coiled Tubing & Wireline Products business group revenues are generally driven by the capital expenditures of well service contractors. These capital expenditures are influenced by the cash flows these contractors generate from well remediation activity, but also by the availability of financing, the outlook for future well remediation activity, and other factors. A portion of the Coiled Tubing & Wireline Products revenue is determined by the demand for spare parts and consumables, the provision of equipment repair services, and the rental of well remediation equipment, which the Company believes are generally determined directly by the level of well remediation activity.

Drilling and well remediation activity can fluctuate significantly in a short period of time. The willingness of oil and gas operators to make capital investments to explore for and produce oil and natural gas will continue to be influenced by numerous factors over which the Company has no control, including: the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to maintain oil price stability through voluntary production limits of oil; the level of oil production by non-OPEC countries; supply and demand for oil and natural gas; general economic and political conditions; costs of exploration and production; and the availability of new leases and concessions and governmental regulations regarding, among other things, environmental protection, taxation, price controls and product allocations. The willingness of drilling contractors and well remediation contractors to make capital expenditures for the type of specialized equipment the Company provides is also influenced by numerous factors over which the Company has no control, including: the general level of oil and gas well drilling and well remediation; access to external financing; outlook for future increases in well drilling and well remediation activity; and government regulations regarding, among other things, environmental protection, taxation, and price controls.

Drilling activity was generally high in 2001, but began to decline in the second half due to lower oil and gas prices. Beginning in late 2002, higher gas prices in the U.S. led to rising gas drilling activity in Canada and most U.S. onshore areas throughout 2003. Higher oil prices led to higher oil drilling activity levels in 2003 in several international markets, including the Middle East, the Far East and several key Latin American markets. Mexico drilling activity by Pemex (national oil company in Mexico) increased due to significant increases in Pemex’s capital budget to drill new wells. However, other historically important markets for the Company remained slow in 2003, including the Gulf of Mexico, the North Sea, and Venezuela. Markets for the capital equipment the Company sells generally weakened in 2003 as major pressure pumping and coiled tubing service providers, and offshore drilling contractors curtailed purchases of new equipment and reduced construction of new drilling rigs. Sales of coiled tubing units and wireline units grew slightly in 2003 as orders from independent pressure pumping companies offset the decline in orders from major companies. Lower capital equipment purchases by drilling contractors in 2003 adversely affected the Company’s Drilling Equipment and Drilling Services businesses, which sell capital equipment used in drilling, and also adversely affected the Company’s Tubular Services business, which applies coating to new drillpipe purchased by drilling contractors from other suppliers.

Oil and Gas Well Drilling and Remediation Processes

Oil and gas wells are usually drilled by drilling contractors using a drilling rig. A bit is attached to the end of a drill stem, which is assembled by the drilling rig and its crew from 30-foot joints of drillpipe and specialized drilling components. Using the conventional rotary drilling method, the drill stem is turned from the rotary table of the drilling rig by torque applied to the kelly, which is screwed into the top of the drill stem.

During drilling, heavy drilling fluids or “drilling muds” are pumped down the drill stem and forced out through jets in the bit. The drilling mud returns to the surface through the hole area surrounding the drill stem,

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carrying with it the drill cuttings drilled out by the bit. The drill cuttings are removed from the mud by a solids control system (which can include shakers, centrifuges and other specialized equipment) and disposed of in an environmentally sound manner. The solids control system permits the mud, which is often comprised of expensive chemicals, to be continuously reused and recirculated back into the hole. Through its Drilling Services business, the Company sells and rents solids control equipment, and provides solids control services. Many operators internally coat the drill stem to protect it from corrosive fluids sometimes encountered during drilling, and inspect and assess the integrity of the drill pipe from time to time. Through its Tubular Services business, the Company provides drillpipe inspection and coating services.

As the hole depth increases, the kelly must be removed frequently so that additional 30-foot joints of drill pipe can be added to the drill stem. When the bit becomes dull or the equipment at the bottom of the drill stem otherwise requires servicing, the entire drill stem is pulled out of the hole and disassembled by disconnecting the joints of drillpipe. These are set aside or “racked,” the old bit is replaced or service is performed, and the drill stem is reassembled and lowered back into the hole (a process called “tripping”). During drilling and tripping operations, joints of drill pipe must be screwed together and tightened (“made up”), and loosened and unscrewed (“spun out”). The Company’s Drilling Equipment business provides drilling systems to manipulate and maneuver the drill pipe in this manner. When the hole has reached certain depths, all of the drill pipe is pulled out of the hole and larger diameter pipe known as casing is lowered into the hole and permanently cemented in place in order to protect against collapse and contamination of the hole. The casing is typically inspected before it is lowered into the hole, a service the Company’s Tubular Services business provides. The Company’s Coiled Tubing & Wireline Products Group manufactures pressure pumping equipment that is used to cement casing in place.

The raising and lowering of the drill stem while drilling or tripping, and the lowering of casing into the wellbore, are accomplished with the rig’s hoisting system. A conventional hoisting system is a block and tackle mechanism that works within the drilling rig’s derrick. The Company’s Drilling Equipment Group sells and installs pipe hoisting systems.

During the course of normal drilling operations, the drill stem passes through different geological formations, which exhibit varying pressure characteristics. If this pressure is not contained, oil, gas and/or water would flow out of these formations to the surface. The two means of containing these pressures are (i) primarily the circulation of drilling muds while drilling and (ii) secondarily the use of blowout preventers should the mud prove inadequate and in an emergency situation.

Drilling muds are carefully designed to exhibit certain qualities that optimize the drilling process. In addition to containing formation pressure, they must (i) cool the drill bit, (ii) carry drilled solids to the surface, and (iii) protect the drilled formations from being damaged. Achieving these objectives often requires a formulation specific to a given well and can involve the use of expensive chemicals as well as natural materials such as certain types of clay. The fluid itself is often oil or more-expensive synthetic mud. Given this expense, it is highly desirable to reuse as much of the drilling mud as possible. Solids control equipment such as shale shakers, centrifuges, cuttings dryers, and mud cleaners help accomplish this objective. The Company’s Drilling Services group rents, sells, operates and services this equipment. Drilling muds are formulated based on expected drilling conditions. However, as the hole is drilled, the drill stem may encounter a high pressure zone where the mud density is inadequate to maintain sufficient pressure. Should efforts to “weight up” the mud in order to contain such a pressure kick fail, a blowout could result, whereby reservoir fluids would flow uncontrolled into the well. To prevent blowouts to the surface of the well, a series of high-pressure valves known as blowout preventers (“BOPs”) are positioned at the top of the well and, when activated, form tight seals that prevent the escape of fluids. When closed, conventional BOPs prevent normal rig operations. Therefore, the BOPs are activated only if drilling mud and normal well control procedures cannot safely contain the pressure. BOPs have been designed to contain pressure of up to 20,000 psi. The Company’s Drilling Equipment business sells several types of BOPs.

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The operations of the rig and the condition of the drilling mud are closely monitored by various sensors, which measure operating parameters such as the weight on the rig’s hook, the incidence of pressure kicks, the operation of the drilling mud pumps, etc. Through its Drilling Services business, the Company sells and rents drilling rig instrumentation packages that perform these monitoring functions.

After the well has reached its total depth and the final section of casing has been set, the drilling rig is moved off of the well and the well is prepared to begin producing oil or gas in a process known as “well completion.” Well completion usually involves installing production tubing concentrically in the casing. Due to the corrosive nature of many produced fluids, production tubing is often inspected and coated, which are services offered by the Company’s Tubular Services business. Sometimes operators choose to use corrosion resistant composite materials (which the Company offers through its Tubular Services business), or corrosion-resistant alloys.

From time to time, a producing well may undergo workover procedures to extend its life and increase its production rate. Workover rigs are used to disassemble the wellhead, tubing and other completion components of an existing well in order to stimulate or remediate the well. Workover rigs are similar to drilling rigs in their capabilities to handle tubing, but are usually smaller and somewhat less sophisticated. Tubing and sucker rods removed from a well during a well remediation operation is often inspected to determine its suitability to be reused in the well, which is a service the Company’s Tubular Services business provides.

Frequently coiled tubing units or wireline units are used to accomplish certain well remediation operations or well completions. Coiled tubing is a recent advancement in petroleum technology consisting of a continuous length of reeled tubing which can be injected concentrically into the production tubing all the way to the bottom of most wells. It permits many operations to be performed without disassembling the production tubing, and without curtailing the production of the well. Wireline winch units are devices that utilize single-strand or multistrand wires to perform well-remediation operations, such as lowering tools and transmitting data to the surface. Through its Coiled Tubing & Wireline Products business, the Company sells and rents various types of coiled tubing equipment, coiled tubing pipe, wireline equipment and tools.

Drilling Equipment Group

The Company has a long tradition of pioneering innovations in drilling systems which improve the efficiency, safety, and cost of drilling operations. The Drilling Equipment Group designs, manufactures and sells a wide variety of top drives, automated pipe racking systems, motion compensation systems, rig controls, BOPs, handling tools, drawworks, risers, rotary tables, and other drilling equipment for both the onshore and offshore markets. Recently the Company successfully expanded its business in the land rig market. The Drilling Equipment Group sells directly to drilling contractors, rig fabricators, national oil companies and major and independent oil and gas companies. Demand for its products, several of which are described below, is strongly dependent upon capital spending plans by oil and gas companies and drilling contractors, and the level of oil and gas well drilling activity.

In 2003, approximately 21% of the Drilling Equipment Group’s sales were for equipment for newly constructed drilling rigs, 28% were for upgrades and refurbishments of existing rigs, 49% were for aftermarket spares and services, and 2% were for production chokes and other.

Top Drives.    The Top Drive Drilling System (“TDS”), originally introduced by Varco in 1982, significantly alters the traditional drilling process. The TDS rotates the drill stem from its top, rather than by the rotary table, with a large electric motor affixed to rails installed in the derrick that traverses the length of the derrick to the rig floor. Therefore, the TDS eliminates the use of the conventional rotary table for drilling. Components of the TDS also are used to connect additional joints of drill pipe to the drill stem during drilling operations.

The TDS combines elements of pipe handling tools, as well as hoisting and rotary equipment, into a single system. During drilling operations, the TDS performs functions such as making-up joints of drill pipe,

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maneuvering joints of drill pipe into position to be added to the drill stem when drilling, and holding and hoisting the entire drill stem. Drilling with a TDS provides several advantages over conventional drilling. It enables drilling with three joints of drill pipe, often reducing by two-thirds the time spent in making connections of drill pipe. In addition, it facilitates “horizontal” and “extended reach” drilling (the practice of drilling wells which deviate substantially from vertical) by providing the ability to rotate the pipe as it is removed from, or placed into, the well, thus reducing the likelihood of the drill stem becoming stuck in the wellbore—a phenomenon that may occur when drill pipe remains stationary in the wellbore for a prolonged period. By facilitating extended reach drilling, the TDS increases the area which can be drilled from a given location, such as a fixed platform. Thus, the production from a given reservoir of oil can be increased, and the number of costly fixed platforms required to develop the field can be minimized. Over the past few years the Company began targeting TDS sales into the land drilling market. Between 2001 and 2003, approximately 145 TDS units, or 77% of total top drive sales, were sold by the Company into land drilling applications.

Pipe Racking Systems.    Pipe racking systems are used to handle drill pipe, casing and tubing on a drilling rig. Vertical pipe racking systems move drill pipe and casing between the well and a storage (“racking”) area on the rig floor. Horizontal racking systems are used to handle tubulars while stored horizontally (for example, on the pipe deck of an offshore rig) and transport tubulars up to the rig floor and into a vertical position for use in the drilling process.

Vertical pipe racking systems are used predominantly on offshore rigs and are found on almost all floating rigs. Mechanical vertical pipe racking systems greatly reduce the manual effort involved in pipe handling. The Pipe Handling Machine (“PHM”), introduced by Varco in 1985, provides a fully automated mechanism for handling and racking drill pipe during drilling and tripping operations, spinning and torquing drill pipe, and automatic hoisting and racking of disconnected joints of drill pipe. These functions are integrated via computer controlled sequencing, and operated by a driller in an environmentally secure cabin. An important element of this system is the Iron Roughneck, which was originally introduced by Varco in 1976 and is an automated device that makes pipe connections on the rig floor and requires less direct involvement of rig floor personnel in potentially dangerous operations. The Automated Roughneck is an automated microprocessor-controlled version of the Iron Roughneck. In late 2002 the Company introduced its new ST-80 Iron Roughneck to expand into the land rig market. Through 2003 the Company has sold approximately 77 units.

Horizontal pipe racking systems were introduced by Varco in 1993. They include the Pipe Deck Machine (“PDM”), which is used to manipulate and move tubulars while stored in a horizontal position; the Pipe Transfer Conveyor (“PTC”), which transports sections of pipe to the rig floor; and a Pickup Laydown System (“PLS”), which raises the pipe to a vertical position for transfer to a vertical racking system. These components may be employed separately, or incorporated together to form a complete horizontal racking system, known as the Pipe Transfer System (“PTS”).

Hoisting systems are used to raise or lower the drill stem while drilling or tripping, and to lower casing into the wellbore. During 1999, Varco introduced its first “Automated Hoisting System” (“AHS”), which uses an AC-powered motor and a braking system that offers very precise control. The AHS automates the repetitive hoisting and drilling operations through the user-friendly, touch-screen Electronic Driller interface. The AHS is smaller and lighter than conventional hoisting systems. The Company received its first order for an AHS in 2000 and delivered the first AHS in 2001. Most of the AHS systems sold by the Company have been for the land rig market.

Blow-out Preventers.    BOPs are devices used to seal the space (“annulus”) between the drill pipe and the borehole to prevent blow-outs (uncontrolled flows of formation fluids and gases to the surface). The Drilling Equipment Group manufactures BOPs under the Shaffer brand name. Ram and annular BOPs are back-up devices and are activated only if other techniques for controlling pressure in the wellbore are inadequate. When closed, these devices prevent normal rig operations. Ram BOPs seal the wellbore by hydraulically closing rams (thick heavy blocks of steel) against each other across the wellbore. Specially designed packers seal around

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specific sizes of pipe in the wellbore, shear pipe in the wellbore or close off an open hole. Annular BOPs seal the wellbore by hydraulically closing a rubber packing unit around the drill pipe or kelly or by sealing against itself if nothing is in the hole. Varco’s Pressure Control While Drilling (“PCWD”) BOP, introduced in 1995, allows operators to drill at pressures up to 2,000 psi without interrupting normal operations, and can act as a normal spherical BOP at pressures up to 5,000 psi.

In 1998 Varco introduced the NXT^® ram type BOP which eliminates door bolts, providing significant weight and space savings. Its unique features make subsea operation more efficient through faster ram configuration changes without tripping the BOP stack.

The Company sells conventional BOP control systems under the registered trademark Shaffer^®. This control system is hydraulically activated and is used to operate BOPs and associated valves remotely for both land systems and offshore systems. With the recent increase in deep-water drilling depths, traditional hydraulic control systems are inadequate to activate BOPs, which rest on the ocean floor and may be 5,000 feet or more below the surface. In 1997, Varco introduced the IVth Subsea Generation MUX, an electronic control system designed specifically for deep-water applications. In 2001, the Company acquired technology from Maris International related to a continuous circulation device the Company plans to commercialize.

Motion Compensation Systems.    The Drilling Equipment Group sells motion compensation equipment under the registered trademark Shaffer^®. Motion compensation equipment stabilizes the bit on the bottom of the hole, increasing drilling effectiveness of floating offshore rigs by compensating for wave and wind action. Tensioners provide continuous axial tension to the marine riser pipe (larger diameter pipe which connects floating drilling rigs to the well on the ocean floor) and guide lines on floating drilling rigs, tension leg platforms and jack-up drilling rigs. In 1996 Varco introduced the Riser Recoil System, which provides a safe disconnect when the floating rig encounters an unanticipated need to leave location, for example during severe weather.

Pipe Handling Tools.    The Company’s pipe handling tools are designed to enhance the safety, efficiency and reliability of pipe handling operations. Many of these tools have provided innovative methods of performing the designated task through mechanization of functions previously performed manually. The Drilling Equipment Group manufactures various tools used to grip, hold, raise, and lower pipe, and in the making up and breaking out of drill pipe, workstrings, casing and production tubulars including spinning wrenches, manual tongs, torque wrenches and kelly spinners.

The Drilling Equipment Group also manufactures other tools used in various pipe handling functions. Slips are gripping devices which hold pipe or casing in suspension while in the hole. Other products, which include safety clamps, casing bushings and casing bowls, are used to hold and guide drill pipe or casing while in the hole, prevent tool strings from being dropped down the well accidentally, and ensure that the casing is centered in the hole.

Rotary Equipment.    Rotary equipment products consist of kelly bushings and master bushings. The kelly bushing applies torque to the kelly to rotate the drill stem and fits in the master bushing which is turned by the rotary table on the floor of the rig. The Drilling Equipment Group produces kelly bushings and master bushings for most sizes of kellys and makes of rotary tables. In 1998, Varco introduced the Rotary Support Table for use on rigs with Top Drive Drilling Systems. The Rotary Support Table is used in concert with the TDS to completely eliminate the need for the larger conventional rotary table.

Derricks and substructures.    The Company began offering design, fabrication and repair services for derricks and substructures through its September 2001 acquisition of Morinoak International Ltd., with engineering and fabrication facilities in Great Yarmouth, England and Aberdeen, Scotland. MIL represented the Company’s first entrance into the business of designing and fabricating large drilling rig structural components such as masts and substructures. In 2003 the Company experienced significant cost over runs on a sophisticated land rig it had contracted to supply on a turnkey basis, for a customer in the Middle East, for approximately

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$31 million. The cost overruns were attributable to errors in the original design of the rig, underestimation of the costs of rig-up and commissioning, cost due to delays of the project, and adverse foreign currency exchange changes related to the strengthening of the British Pound against the U.S. Dollar. As a result of the losses on the turnkey rig fabrication project, and continuing operating losses from the MIL business, the Company decided to exit the rig fabrication business of MIL, and expects to close the operation in 2004. The Company expects to incur additional losses associated with this project and with exiting the MIL business during 2004. In the future the Company expects to avoid turnkey risk on such projects by bidding complete rig packages with other third party structural engineering and fabrication firms.

Service & Spares.    Approximately 49 percent of the sales of the Drilling Equipment Group consist of spare and replacement parts, consumables, provision of drilling equipment repair services, and rental of drilling systems.

Facilities.    The Company conducts Drilling Equipment manufacturing operations at major facilities in Orange, California; Houston, Texas; Mexicali, Mexico; and Etten-Leur, Netherlands. The Drilling Equipment Group maintains sales and service offices in most major oilfield markets, either directly or through agents. The Company expanded its market presence in Norway when it acquired its agent, Scana IOS Desco AS, in December 2000, and expanded its drilling equipment repair business through the acquisition of Church Oil Tools in early 2003.

Competition.    The products of the Drilling Equipment Group are sold in highly competitive markets and its sales and earnings can be affected by competitive actions such as price changes, new product development or improved availability and delivery. The group’s primary competitors are Access Oil Tools; Aker Kvaerner AS; Canrig (a division of Nabors Industries); Cavins Oil Tools; Cooper Cameron Corporation; DenCon Oil Tools; Hydril Company; National-Oilwell, Inc.; Tesco Corporation; Wirth M&B GmbH; and Weatherford International, Inc. Management believes that the principal competitive factors affecting its Drilling Equipment business are performance, quality, reputation, customer service, product availability, availability of spare parts and consumables, breadth of product line and price.

See the Company’s Executive Summary and Drilling Equipment Group Restructuring and MIL Impairment Charge in Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Tubular Services Group

The Company’s Tubular Services Group provides a variety of tubular services to oil and gas producers, national oil company’s, drilling contractors, well-remediation service companies, pipeline operators, and tubular processors, manufacturers and distributors. The Tubular Services group provides inspection and reclamation services for drill pipe, casing, production tubing, sucker rods and line pipe at drilling and workover rig locations, at yards owned by its customers, at steel mills and processing facilities that manufacture tubular goods, and at facilities which it owns. The Tubular Services group also provides for the internal coating of tubular goods at 12 coating plants worldwide. The Company also conducts tubular coating operations through licensees in certain locations. Additionally, the Company designs, manufactures and sells high pressure fiberglass and composite tubulars for use in corrosive applications, and provides in-place inspection of oil, gas and product transmission pipelines through its application of instrumented survey tools (“smart pigs”) which it engineers, manufactures and operates.

The Company’s Tubular Services business was increased significantly through its acquisition of substantially all of the assets of the oilfield services business of ICO, Inc., including the stock of its Canadian operating subsidiary, on September 6, 2002. The ICO oilfield services business provides tubular inspection, coating and reclamation; sucker rod inspection and reclamation; tubular transport and logistics management; and beam pump engine repair. Operations are primarily conducted in North America. Since the acquisition the Company has effected efficiency gains and consolidation savings by combining the oilfield service business of ICO into its original operations.

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The Company’s customers rely on tubular inspection services to avoid failure of tubing, casing, flowlines, pipelines and drill pipe. Such tubular failures are expensive and in some cases catastrophic. The Company’s customers rely on internal coatings of tubular goods to prolong the useful lives of tubulars and to increase the volumetric throughput of in-service tubular goods. The Company’s customers sometimes use fiberglass or composite tubulars in lieu of conventional steel tubulars, due to the corrosion-resistant properties of fiberglass and other composite materials. Tubular inspection and coating services are used most frequently in operations in high-temperature, deep, corrosive oil and gas environments. In selecting a provider of tubular inspection and tubular coating services, oil and gas operators consider such factors as reputation, experience, technology of products offered, reliability and price.

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

The Company has a history of introducing new coating products that are custom-engineered to address increasingly corrosive environments encountered in oil and gas drilling and production operations. In 1998, the Company introduced TK^®Liner, a fiberglass liner product which offers the strength of steel tubing and the corrosion resistance of fiberglass, and which supplements its traditional plastic coating lines. The Company’s reputation for supplying quality internal coatings is an important factor in its business, since the failure of coatings can lead to expensive production delays and premature tubular failure.

Fiberglass & Composite Tubulars.    When compared to conventional carbon steel and even corrosion-resistant alloys, resin-impregnated fiberglass and other modern plastic composites often exhibit superior resistance to corrosion. Some producers manage the corrosive fluids sometimes found in oil and gas fields by utilizing composite or fiberglass tubing, casing and line pipe in the operations of their fields. In 1997, the Company acquired Fiber Glass Systems, a leading provider of high pressure fiberglass tubulars used in oilfield applications, to further serve the tubular corrosion prevention needs of its customers. Fiber Glass Systems has manufactured fiberglass pipe since 1968 under the name “Star^®,” and was the first manufacturer of high-pressure fiberglass pipe to be licensed by the API in 1992. The Company acquired two fiberglass and composite tubing manufacturing facilities in the U.S. and one in China from A.O. Smith in December 2000, acquired another U.S. fiberglass tubing manufacturing facility from Fibercast in July 2001 and acquired a small fiberglass business in China in early 2004. These acquisitions have extended the Company’s fiberglass and composite tubing offering into industrial and marine applications, in addition to its oilfield market.

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

The Tubular Services group’s tubular inspection services employ all major non-destructive inspection techniques, including electromagnetic, ultrasonic, magnetic flux leakage and gamma ray. These inspection services are provided both by mobile units which work at the wellhead as used tubing is removed from a well, and at fixed site tubular inspection locations. The group provides an ultrasonic inspection service for detecting

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potential fatigue cracks in the end area of used drill pipe, the portion of the pipe that traditionally has been the most difficult to inspect. Tubular inspection facilities also offer a wide range of related services, such as API thread inspection, ring and plug gauging, and a complete line of reclamation services necessary to return tubulars to useful service, including tubular cleaning and straightening, hydrostatic testing and re-threading.

In addition, the Company applies hardbanding material to drillpipe, to enhance its wear characteristics and reduce downhole casing wear as a result of the drilling process. In 2002, the Company introduced its proprietary line of hardbanding material, TCS—8000^™.

In 1998, the Company acquired three tubular services businesses to enhance its competitive positions in Norway, Egypt, and the west coast of the United States. Additionally, these acquisitions provided opportunities to achieve consolidation cost savings. In 1999, the Company completed acquisitions of Geo-Ray Oilfield Inspections Ltd. in Canada, and the tubular services business of AGR Services AS in Floro, Norway. In 2001, the Company acquired the assets of Servizi Ispettivi, a small tubular services business in Italy, and in 2002, the Company acquired the assets of A&A Tubular Inspection in California, and substantially all of the oilfield services business of ICO, Inc. In early 2003, the Company acquired the tubular services assets of Petroleum Tubular Inspection in South America, and the Company’s exclusive tubular services agent in Mexico, Tecnicos Tubulares.

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

The Company has pioneered many tubular inspection technologies used in the oilfield, and continues to expand its product offering. In 1996, the Company installed its first proprietary high-speed full-body ultrasonic tubular inspection unit (Truscope^®). The new service provides 100% ultrasonic coverage of tubulars at a rate of up to 200 feet per minute. In 1997, the Company began offering a proprietary, patented external tubular connection integrity test, the ISO-Gator,^™ for use at the rig site. The technology was obtained through the Company’s acquisition of the operating assets of Gator Hawk, Inc. In 1998, the Company introduced a new coiled tubing inspection service with its electromagnetic CT Scope^®.

Mill Systems and Sales.    The Company engineers and fabricates inspection equipment for steel mills, which it sells and rents. The equipment is used for quality control purposes to detect defects in the pipe during the high-speed manufacturing process. Each piece of mill inspection equipment is designed to customer specifications and is installed and serviced by the Company. Since 1962, the Company has installed more than 80 units worldwide, in most major steel mills. Equipment is manufactured at the Company’s Houston, Texas and Celle, Germany facilities. Revenue for Mill Systems and Sales fluctuates significantly from year to year due to the timing of negotiating large domestic and export sales contracts, arranging financing and manufacturing equipment.

Sucker Rod Inspection & Reclamation.    The 2002 acquisition of the oilfield services business of ICO, Inc. provided the Tubular Services group a significant sucker rod services business. The Tubular Services group cleans, straightens, inspects and coats sucker rods at eleven facilities throughout the Western Hemisphere. Additionally, new sucker rods are inspected before they are placed into service, to avoid premature failure, which can cause the oil well operator to have to pull and replace the sucker rod. The Company further strengthened its position in this market with the acquisition of Patco Rod Service, Inc. in California in 2003.

Pipeline Inspection.    In-place inspection services for oil and gas pipelines identify anomalies in pipelines without removing or dismantling the pipelines or stopping the product flow, giving customers a convenient and cost-effective method of identifying potential defects. The Tubular Services group inspects pipelines by launching a sophisticated survey instrument into the pipeline. Propelled by the product flow, the instrument uses

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electromagnetics, ultrasonics, and mechanical measurements received on digital and analog media to monitor the severity and location of internal and external pitting-type corrosion as well as other mechanical anomalies in the pipeline, providing a basis for evaluation and repair by the customer. Once the test is complete, the survey instrument is returned to the Company, refurbished and used for future pipeline inspections.

Management believes the major competitive factors for Pipeline Services are reputation for quality, service, reliability of obtaining a successful survey on the first run, product technology, price, and technical support on survey interpretation. Demand for the Company’s pipeline services is somewhat dependent on commodity prices, which affect funds available for discretionary pipeline inspection and maintenance expenditures by many pipeline operators. This dependence is most pronounced in international markets. Additionally, significant consolidation in the pipeline industry has caused many pipeline operators to defer inspections in recent years as they re-evaluate their pipeline maintenance programs following mergers and acquisitions.

Management believes there are growth opportunities for the Company’s Pipeline Services due to the aging of the worldwide pipeline network, construction of new pipelines, and recent changes in U.S. regulatory requirements. In 2001, the Company acquired certain assets of Geodz, Inc., a software engineering firm, to enhance its pipeline position survey software, and in 2002 it acquired the assets of Marr Associates Pipeline Integrity, Ltd, a Canadian provider of data management and direct pipeline assessment services. Additionally, in 2002 the Company acquired approximately 24 percent of NDT Systems & Services, AG, a German firm developing a new ultrasonic pipeline inspection tool. As part of the investment the Company obtained certain exclusive rights to market the ultrasonic pipeline inspection service.

Customers and Competition.    The Tubular Services group’s customers include major and independent oil and gas companies, national oil companies, drilling and workover contractors, oilfield equipment and product distributors and manufacturers, oilfield service companies, pipeline operators, steel mills, and other industrial companies. The Company’s competitors in Tubular Services include, among others, Ameron International Corp, EDO Corporation, Pipeline Integrity International Ltd. (a division of General Electric), ShawCor Ltd., Smith International, Inc., Frank’s International, Inc., H. Rosen Engineerng, GmbH; T.D. Williamson, Inc.; and Patterson Tubular Services. In addition, the Tubular Services group competes with a number of smaller regional competitors in tubular inspection. Certain foreign jurisdictions and government-owned petroleum companies located in some of the countries in which this group operates have adopted policies or regulations which may give local nationals in these countries certain competitive advantages. Within the Company’s corrosion control products, certain substitutes such as non-metallic tubulars, inhibitors, corrosion resistant alloys, cathodic protection systems, and non-metallic liner systems also compete with the Company’s products. Management believes that the principal competitive factors affecting its Tubular Services business are performance, quality, reputation, customer service, product availability, availability of spare parts and consumables, breadth of product line and price.

Drilling Services Group

The Company’s Drilling Services group is engaged in the provision of highly-engineered equipment, products and services which separate and manage drill cuttings produced by the drilling process (“Solids Control Services”). Drill cuttings are usually contaminated with petroleum or drilling fluids, and must be disposed of in an environmentally sound manner. Additionally, efficient separation of drill cuttings enables the re-use of often costly drilling fluids. The Drilling Services group also rents and sells proprietary drilling rig instrumentation packages (“Drilling Rig Instrumentation”) and drilling rig control systems (“V-ICIS”) which monitor various processes throughout the drilling operation, under the name MD/Totco. The group’s Rig Instrumentation packages collect and analyze data through both analog and digital media, enabling rig personnel to maintain safe and efficient drilling operations.

Solids Control.    The Drilling Services group uses a variety of technologies to separate drill cuttings from drilling fluids, and to transport, dry and refine drill cuttings for safe disposal. The Company believes the

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regulatory and industry trends toward minimizing the environmental impact of drilling operations in a number of environmentally sensitive oil and gas producing regions will lead to greater demand for solids control products and closed loop drilling systems. A closed loop drilling system is a solids control system in which the drilling mud is reconditioned and recycled throughout the drilling process on the rig itself. The Company further believes the trend towards more technically complex drilling, including highly deviated directional wells and slim-hole completions, will favorably impact the demand for solid controls technology because of its ability to reduce costly downhole problems. As environmental constraints are increased and as awareness of environmental protection grows, the Company believes that its drill cuttings separation and treating processes will experience increased demand.

The Company has a history of introducing new solids control products and services obtained both through its internal development and through acquiring or licensing technologies from others. A shale shaker is the primary device on a drilling rig for removing drill solids from drilling mud. The Company’s VSM 300^™, introduced in 1996, was the first shale shaker which offered a balanced elliptical vibratory motion, which improves cuttings conveyance and reduces oil on cuttings. The Company also introduced its new Cobra^® shale shaker in 1998. The Cobra^® has a small footprint and a lightweight design, and is priced to compete in the more price-sensitive segment of the market. The Company began offering the King Cobra^™ shale shaker in 1999. The King Cobra^™ is approximately one-third larger than the Cobra^® Shaker, and also targets both the offshore and land markets.

The Company acquired the Gumbo Chain from Nu-Tec, Inc. in 1997, a product to remove sticky shale or “gumbo,” which is encountered in certain geologic environments, from drilling fluid. In 1998, the Company initiated operations with a proprietary unit which removes hydrocarbons from drill cuttings using heat, a process called “Thermal Desorption”. The processed cuttings are usually rendered inert and can be disposed of with minimal environmental impact. The Company has commenced operation of additional thermal desorption units in South America and Africa, and acquired the thermal desorption operations of Maersk Contractors Environmental Division in Scotland and Kazakhstan in 2003.

The Company acquired M.S.D. Inc. in 1998 in order to enhance its cuttings slurrification and injection capabilities. In 1999, the Company acquired Manufacturas Rowi, C.A. (Rowica), a Venezuelan solids control company, and the solids control assets of Newpark Resources, Inc. (“Newpark”). In early 2001, the Company acquired certain assets of Angelle Construction, Inc. to enhance its cuttings transport business, and in 2002 it acquired the assets of Environmental Rig Solutions, L.P., a Texas-based provider of waste management equipment for drilling operations. In early 2003, the Company made an equity investment in a small start-up company engaged in the development of new solids control technology. As part of the investment, the Company obtained exclusive marketing rights to new solids control technology for oilfield applications, obtained warrants to purchase additional equity, and agreed to invest additional equity if the company achieves certain technical milestones. In late 2003, the Company acquired Rocky Mountain Fluid Technologies, Inc. in Colorado, and Mud Rentals Ltd. in the UK.

The Drilling Services group manufactures conventional and linear motion shale shakers and shale shaker screens, high speed and conventional centrifuges, desanders (which remove large drill solids from drilling mud), desilters (which remove small drill solids from drilling mud), degassers (which remove air and gasses from drilling mud) and closed loop drilling fluids systems at its facilities in Conroe, Texas; Houston, Texas; Aberdeen, Scotland; Leduc, Alberta; and Trinidad. The group markets solids control equipment under the Brandt^® brand name. For the year ended December 31, 2003, approximately 37% of the Drilling Services group’s solids control revenue was generated from the sale of solids control equipment and inventory, and approximately 63% of such revenue was generated from rentals and services.

Drilling Rig Instrumentation.    The Drilling Services group’s rig instrumentation systems provide drilling rig operators real time measurement and monitoring of critical parameters required to improve rig safety and efficiency. Systems are both sold and rented, and are typically comprised of several sensors placed throughout

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the rig to measure parameters such as weight on bit, hookload, standpipe pressure, mud pump strokes, drilling mud levels, torque, and others, all networked back to a central command station for review, recording and interpretation. Additionally, the rig instrumentation packages typically provide multiple CRT screens around the rig for various rig personnel to perform individual jobs more effectively, and cameras for certain areas to permit remote monitoring. The Company offers proprietary touch-screen displays, interpretive software, and data archival and retrieval capabilities. In 1999, the Company introduced its RigSense^™ product, which combines leading hardware and software technologies into an integrated drilling rig package. This product permits access of drilling data from offsite locations, enabling company personnel to monitor drilling operations from an office environment, through a secure link. In 2001, the Company completed the acquisitions of Chimo Equipment Ltd. in Canada; Alberta Instruments Ltd. in Canada; Adair Supply & Rentals, Inc. in Corpus Christi, TX; and Wagner Instrumentation Inc. in Houston, TX; which were all engaged in drilling rig instrumentation business. In 2003, the Company made an equity investment in a small start-up company engaged in the development of software to enhance RigSense with rig “back office” information such as payroll and purchasing.

Drilling consoles, and recently, the Company’s V-ICIS^™, are typically sold as an integral part of a new rig, or as a major upgrade component for an existing rig. In the United States and Canada, most other drilling instrumentation products are usually rented to the drilling contractor or oil company when necessary, and are therefore not permanently installed on the rig. Internationally, nearly all instrumentation equipment is sold to the rig owner and becomes a permanent part of the drilling rig.

Customers and Competition.    The group’s customers for Drilling Services include major and independent oil and gas companies, national oil companies, and drilling contractors. Competitors in Drilling Services include Smith International (“SWACO”); Derrick Manufacturing Corp.; Oil Tools Pte. Ltd; Peak Energy Services, Ltd.; National Oilwell Inc.; Petron Industries, Inc.; Epoch (a division of Nabors Industries); Pason Systems, Inc.; Kem-tron, Inc.; Double Life Corporation, Inc. and a number of regional competitors. The Company’s Drilling Services group operates in highly competitive markets. Management believes that on-site service is becoming an increasingly important competitive element in the Drilling Services market. Management believes that, in addition to on-site services, the principal competitive factors affecting its Drilling Services business are performance, quality, reputation, customer service, product availability, breadth of product line and price.

Coiled Tubing & Wireline Products Group

The Company’s Coiled Tubing & Wireline Products group sells and rents capital equipment, and sells spare parts, repair services and consumables, to oilfield service providers who use the Company’s products to remediate, workover and, to a lesser extent, drill oil and gas wells. The Company, through its January 2001 acquisition of Quality Tubing, Inc., also manufactures steel coiled tubing used by well remediation contractors and oil and gas producers. Demand for the group’s Coiled Tubing & Wireline Products is strongly dependent upon the capital spending plans of coiled tubing and wireline service companies, and the general level of well completion and remediation activity.

Coiled Tubing Products.    Coiled tubing consists of flexible steel tubing manufactured in a continuous string and spooled on a reel. It can extend several thousand feet in length and is run in and out of the wellbore at a high rate of speed by a hydraulically operated coiled tubing unit. A coiled tubing unit is typically mounted on a truck or skid (steel frames on which portable equipment is mounted to facilitate handling with cranes or flatbed trucks) and consists of a hydraulically operated tubing reel or drum, an injector head which pushes or pulls the tubing in or out of the wellbore, and various power and control systems. Coiled tubing is typically used with sophisticated pressure control equipment which permits the operator to continue to safely produce the well. The Coiled Tubing & Wireline Products group manufactures and sells both coiled tubing units and the ancillary pressure control equipment used in these operations.

Coiled tubing provides a number of significant functional advantages over the principal alternatives of conventional drill pipe and workover pipe. Coiled tubing allows faster “tripping,” since the coiled tubing can be reeled very quickly on and off a drum and in and out of a wellbore. In addition, the small size of the coiled tubing

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unit compared to an average workover rig or drilling rig reduces preparation time at the well site. Coiled tubing permits a variety of workover and other operations to be performed without having to pull the existing production tubing from the well and allows ease of operation in horizontal or highly deviated wells. Thus, operations using coiled tubing can be performed much more quickly and, in many instances, at a significantly lower cost. Finally, use of coiled tubing generally allows continuous production of the well, eliminating the need to temporarily stop the flow of hydrocarbons. As a result, the economics of a workover are improved because the well can continue to produce hydrocarbons and thus produce revenues while the well treatments are occurring. Continuous production also reduces the risk of formation damage which can occur when the flow of fluids is stopped or isolated.

Currently, most coiled tubing units are used in well remediation and completion applications. The Company believes that advances in the manufacturing process of coiled tubing, tubing fatigue protection and the capability to manufacture larger diameter and increased wall thickness coiled tubing strings have resulted in increased uses and applications for coiled tubing products. For example, some well operators are now using coiled tubing in drilling applications such as slim hole reentries of existing wells. The Company engineered and manufactured the first coiled tubing units built specifically for coiled tubing drilling in 1996.

There are certain limitations to the use of coiled tubing. Coiled tubing generally is made of high strength, alloy steel which wears down or fatigues over time as a result of internal pressure, acidic operating environments and normal bending cycles. Thus, operators must carefully monitor the use of the tubing. In addition, coiled tubing will buckle if the weight of the coiled tubing being conveyed in the well becomes too great or if the tube becomes inhibited by some obstacle or irregularity in the wellbore. Buckling has not proven to be a significant obstacle in most well remediation applications, and the Company believes it will become less of an issue as a result of the availability of stronger and larger diameter coiled tubing.

Generally, the Coiled Tubing & Wireline Products group supplies customers with the equipment and components necessary to use coiled tubing, which the customers typically purchase separately. The group’s coiled tubing product line consists of coiled tubing units, coiled tubing pressure control equipment, pressure pumping equipment, snubbing units (which are units that force tubulars into a well when pressure is contained within the wellbore), nitrogen pumping equipment and cementing, stimulation and blending equipment. The group markets its coiled tubing equipment under the Hydra Rig^® brand name primarily to providers of coiled tubing drilling and workover services. The Company’s primary coiled tubing unit production facilities are located at its Hydra Rig facility in Fort Worth, Texas. In addition, the group markets coiled tubing pressure control equipment under the Texas Oil Tools^® brand name and manufactures this equipment at its facility in Conroe, Texas.

The Company’s quality tubing business manufactures coiled tubing at its mill in Houston, Texas. In 2003, Quality Tubing introduced a new corrosion-resistant alloy coiled tubing used primarily for velocity string recompletions (“hang-off” applications) of lower pressure gas wells (QT-16Cr). In addition to hang-off coiled tubing strings, Quality Tubing designs, manufactures, and sells conventional coiled tubing work strings used in well remediation and drilling operations.

The Company began offering its “TEM^™” cementing equipment and fabricating nitrogen pumping units in Tulsa, Oklahoma, in December 1997, when it acquired Tulsa Equipment Manufacturing Company. Additionally, the Company acquired Weston Oilfield Engineering Limited in Norwich, United Kingdom, in December 1998, which strengthened its coiled tubing unit refurbishing, servicing and spare parts business, as well as added new cryogenic nitrogen technologies. The Company’s 2001 acquisition of Bradon Industries added a significant manufacturing plant in Canada, where it sells equipment now under the brand name Hydra Rig Canada. The Company acquired Quality Tubing, Inc. in 2001. It also added additional nitrogen-pumping products and technologies through its 2001 acquisition of Albin’s Enterprises in Duncan, Oklahoma. In early 2004, the Company completed the acquisition of a coiled tubing equipment manufacturer in Texas.

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Wireline Products.    Through its 1996 acquisitions of SSR (International) Ltd. and Pressure Control Engineering Ltd., its 1998 acquisition of Hydrolex and Eastern Oil Tools Pte. Ltd, and its 2001 acquisition of Elmar Services, Ltd., the Company offers a comprehensive line of wireline units and related pressure control products, with manufacturing facilities in Poole and Aberdeen, in the United Kingdom; Perth, Australia; and Singapore. The Company’s acquisition of Eastern Oil Tools Pte. Ltd. in June, 1998 and Elmar Services Ltd. in August, 2001 also added perforating gun and sand control screen manufacturing to the Company’s business.

The Company’s wireline products include wireline drum units, which consist of a spool or drum of wireline cable, mounted in a mobile vehicle or skid, which works in conjunction with a source of power (an engine mounted in the vehicle or within a separate “power pack” skid). The wireline drum unit is used to spool wireline cable into or out of a well, in order to perform surveys inside the well, sample fluids from the bottom of the well, retrieve or replace components from inside the well, or to perform other well remediation or survey operations. The wireline used may be “slickline,” which is conventional steel cable used to convey tools in or out of the well, or “electric line,” which contains an imbedded single-conductor or multi-conductor electrical line which permits communication between the surface and electronic instruments attached to the end of the wireline at the bottom of the well.

Wireline units are usually used in conjunction with a variety of other pressure control equipment which permit safe access into wells while they are flowing and under pressure at the surface. The company engineers and manufactures a broad range of pressure control equipment for wireline operations, including wireline blow out preventers, strippers, packers, lubricators and grease injection units. Additionally, the Company makes wireline rigging equipment such as mast trucks, sheaves, and other items, and offers wireline tools through its Pressure Control Engineering Ltd. business.

The Company has a history of engineering new technologies and products for its Coiled Tubing & Wireline Products markets. It recently introduced the DSH “Sidedoor” Stripper/Packer, which allows packer and bushing replacement while the operator has coiled tubing in the wellbore, and the CT Slimhole BHA Jetting Tool Assembly, a small diameter jetting tool which can traverse small diameter well completion configurations.

Customers and Competition.    The Company’s customers for Coiled Tubing & Wireline Products include major oil and gas coiled tubing service companies, as well as major oil companies, national oil companies, and small independents. Competitors in Coiled Tubing & Pressure Control Products include Stewart & Stevenson Inc.; Precision Tube Technology (a division of Maverick Tube Corporation); Aker Kavaerner AS; ASEP; National Oilwell Inc.; Crown Energy Technologies; and several smaller competitors.

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2003 Acquisitions

In 2003, the Company made the following acquisitions and related transactions:

The Company paid $36.6 million in cash for acquisitions and related transactions in 2003, and paid $2.4 million in cash in 2003 related to transactions closed before 2003.

Seasonal Nature of the Company’s Business

Historically, the level of some of the Company’s businesses has followed seasonal trends to some degree. In general the Drilling Equipment Group has not experienced significant seasonal fluctuation. However, there can be no guarantee that seasonal effects will not influence future drilling equipment sales.

The Company’s Tubular Services (specifically, tubular inspection and tubular coating) and Drilling Services (both solids control and rig instrumentation) businesses in Canada typically realized high first quarter activity levels, as operators took advantage of the winter freeze to help gain access to remote drilling and production areas. These businesses then typically declined during the second quarter due to warming weather conditions which resulted in thawing, softer ground, difficulty accessing drill sites, and road bans that curtailed drilling activity (“Canadian Breakup”). In 2003, the business declined approximately $7.0 million in revenue and $6.0 million in operating profit from the first quarter to the second quarter. Typically in past years, the business rebounds in the third and fourth quarter. In past years, Tubular Services activity in both the United States and Canada increased during the third quarter and then peaked in the fourth quarter as operators spent the remaining drilling and/or production capital budgets for the year.

The pipeline inspection portion of Tubular Services has typically experienced reduced activity during the first quarter of the calendar year. The high winter demand for gas and petroleum products in the northern states and the consequent curtailment of pipeline maintenance and inspection programs has resulted in less opportunity to perform pipeline inspection during this time. The Company’s Fiberglass Pipe business in China has typically declined in the first quarter due to the impact of weather on manufacturing and installation operations, and due to business slow downs associated with the Chinese New Year.

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

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The Company anticipates that these seasonal trends will continue. However, there can be no guarantee that spending by the Company’s customers will continue or that other customers will remain the same as in prior years.

Marketing & Distribution Network

The Company’s products are marketed through a sales organization and a network of agents and distributors, which spans most major oilfield markets.

The Company’s Drilling Equipment customers include private and government-owned oil companies, drilling contractors, drilling rig manufacturers, rental tool companies, and supply companies, which supply oilfield products to the end users of the Company’s products. Drilling Equipment purchases can represent significant capital expenditures, and are often sold as part of a rig fabrication or major rig refurbishment package. Sometimes these packages cover multiple rigs, and often the Company bids jointly with other related product and services providers, such as rig fabrication yards and rig design firms.

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

The Company’s Drilling Services customers are predominantly major and independent oil and gas companies, national oil companies and drilling contractors. The Drilling Services group operates sales and distribution facilities at strategic locations worldwide to service areas with high drilling activity. The Company’s worldwide solids control and instrumentation sales employees are complemented by service and engineering facilities which provide specialty repair and maintenance services to customers. Sales of capital equipment are sometimes made through rig fabricators, and often are bid as part of a rig fabrication package or rig refurbishment package. Sometimes these packages cover multiple rigs, and often the Company bids jointly with other related service providers.

The Company’s Coiled Tubing and Wireline Products customers include major oil and gas coiled tubing service companies, as well as major oil companies, national oil companies, and small independents. The products are sold directly to end users through a worldwide Coiled Tubing & Wireline Products sales organization or through the Company’s sales agents. The Company also has in place certain exclusive alliances with major oilfield services companies to provide pressure control equipment.

The Company’s foreign operations, which include significant operations in Canada, Europe, the Far East, the Middle East and Latin America, are subject to the risks normally associated with conducting business in foreign countries, including foreign currency exchange risks and uncertain political and economic environments, which may limit or disrupt markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property without fair compensation. Government-owned petroleum companies located in some of the countries in which the Company operates have adopted policies (or are subject to governmental policies) giving preference to the purchase of goods and services from companies that are majority-owned by local nationals. As a result of such policies, the Company relies on joint ventures, license arrangements and other business combinations with local nationals in these countries. In addition, political considerations may disrupt the commercial relationship between the Company and such government-owned petroleum companies. Although the Company has not experienced any significant problems in foreign countries arising from nationalistic policies,

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political instability, economic instability or currency restrictions, there can be no assurance that such a problem will not arise in the future. See Note 12 of the Notes to the Consolidated Financial Statements for information regarding geographic revenue information.

Research and New Product Development and Intellectual Property

The Company believes that it has been a leader in the development of new technology and equipment to enhance the safety and productivity of drilling and well stimulation processes and that its sales and earnings have been dependent, in part, upon the successful introduction of new or improved products. Additionally, the Company believes that its market position in its major businesses is enhanced by its leading technologies and reputation for innovation and expertise. Through its internal development programs and certain acquisitions, the Company has assembled an extensive array of technologies protected by a substantial number of trade and service marks, patents, trade secrets, and other proprietary rights.

As of December 31, 2003, the Company held a substantial number of United States patents and had patent applications pending. Expiration dates of such patents range from 2004 to 2020. As of such date, the Company also had foreign patents and patent applications pending relating to inventions covered by the United States patents. Additionally, the Company maintains a substantial number of trade and service marks and maintains a number of trade secrets.

Although the Company believes that this intellectual property has value, competitive products with different designs have been successfully developed and marketed by others. The Company considers the quality and timely delivery of its products, the service it provides to its customers and the technical knowledge and skills of its personnel to be more important than its intellectual property in its ability to compete. While the Company stresses the importance of its research and development programs, the expense and market uncertainties associated with the development and successful introduction of new products are such that there can be no assurance that the Company will realize future revenues from new products.

Engineering and Manufacturing

The manufacturing processes for the Company’s products generally consist of machining, welding and fabrication, heat treating, assembly of manufactured and purchased components and testing. Most equipment is manufactured primarily from alloy steel, and the availability of alloy steel castings, forgings, purchased components and bar stock is critical to the production and timing of shipments. Within the Drilling Equipment Group, automated Roughnecks, Top Drive Drilling Systems, and pipe handling systems are manufactured in Orange, California; pressure control and motion compensation equipment, riser pipe and riser tensioners are manufactured at facilities in Houston, Texas; rotating and handling tools are manufactured at facilities in Etten-Leur, the Netherlands, and Mexicali, Mexico.

The Company’s Drilling Services group manufactures or assembles the equipment and products which it rents and sells to customers, and which it uses in providing solids control services. In addition to producing new solids control and instrumentation equipment and products, Drilling Services also produces spare parts for sale. Drilling Services manufactures screens used in its solids control operations and for sale to others at its New Iberia, Louisiana; Conroe, Texas; Leduc, Alberta; Aberdeen, Scotland; and Couva, Trinidad facilities; manufactures solids control equipment at its facilities in Houston, Texas; Conroe, Texas; and Aberdeen, Scotland; and manufactures instrumentation equipment at its Cedar Park, Texas facility.

The Tubular Services group manufactures tubular inspection equipment and instrumented pipeline inspection tools at its Houston, Texas facility for resale, and renovates and repairs equipment at its manufacturing facilities in Houston, Texas; Bordon, England; Celle, Germany; Nisku, Alberta and Aberdeen, Scotland. Fiberglass and composite tubulars and fittings are manufactured at its San Antonio, Texas; Big Spring, Texas; Little Rock, Arkansas; Tulsa, Oklahoma; Wichita, Kansas; and Harbin and Shanghai, China facilities, while tubular coatings are manufactured in its Houston, Texas facility, or through restricted sale agreements with third party manufacturers.

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The Coiled Tubing and Wireline Products group manufactures coiled tubing units, coiled tubing, wireline units, pressure pumping equipment, pressure control equipment; sand control screens and perforating guns at its Fort Worth, Texas; Conroe, Texas; Houston, Texas; Duncan, Oklahoma; Tulsa, Oklahoma; Calgary, Canada; Aberdeen, Scotland; Singapore; Perth, Australia; and Poole, England facilities.

Certain of the Company’s manufacturing facilities and certain of the Company’s products have various certifications, including, ISO 9001, API and ASME.

Raw Materials

The Company believes that materials and components used in its servicing and manufacturing operations and purchased for sales are readily available at competitive prices from numerous sources. The prices paid by the Company for its raw materials may be affected by, among other things, energy, steel and other commodity prices; tariffs and duties on imported materials; and foreign currency exchange rates. The Company believes that it may experience higher steel prices in 2004 than it has experienced in 2003, based on recent increases in spot prices for steel.

Backlog

Sales of the Company’s products are made on the basis of written purchase orders or contracts and, consistent with industry practice, by e-mail, fax, letter or oral commitment later confirmed by a written order. In accordance with industry practice, orders and commitments generally can be cancelled by customers at any time. In addition, orders and commitments are sometimes modified before or during manufacture of the products. The Company’s backlog is based upon anticipated revenues from customer orders that the Company believes are firm. The level of backlog at any particular time is not necessarily indicative of the future operating performance of the Company. Almost all of the Company’s backlog is for capital equipment orders. Although aftermarket spares, services and consumables for Drilling Equipment and Coiled Tubing and Wireline products are included in the Company’s order intake and backlog, these are typically turned quickly, and comprise a small portion of the backlog.

Backlog at December 31, 2003, 2002, and 2001 was as follows (in thousands):

See the discussion of the recent decline in backlog in the Executive Summary section of Management’s Discussion and Analysis of Results of Operations and Financial Condition. Backlog at December 31, 2003 includes $43.2 million related to the Company’s MIL rig fabrication business. As discussed earlier, the Company expects to exit the rig fabrication business in 2004. The Company expects that most of the backlog as of December 31, 2003 will be shipped by December 31, 2004.

Environmental Matters

The Company’s manufacturing processes and its inspection, coating and solids control services routinely involve the handling and disposal of chemical substances and waste materials, some of which may be considered to be hazardous wastes. These potential hazardous wastes result primarily from the manufacturing and testing

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processes and the use of mineral spirits to clean pipe threads during the tubular inspection process and from the coating process, and the handling of and, in normal cases, the disposal of drilling fluids and cuttings on behalf of the drillers and/or producers.

The Company’s operations are subject to numerous local, state and federal laws and regulations, including the regulations promulgated by the Occupational Safety and Health Administration, the United States Environmental Protection Agency (EPA), the Nuclear Regulatory Commission and the United States Department of Transportation. These laws and regulations include the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the Resource Conservation and Recovery Act (RCRA), the Clean Air Act (CAA), the Clean Water Act (CWA), the Superfund Amendments and Reauthorization Act (SARA) including SARA Title III toxic release reporting, the Safe Drinking Water Act (SDWA) and the Toxic Substance Control Act (TSCA). Management believes that the Company is in substantial compliance with these laws and regulations, and that the compliance and remedial action costs associated with these laws and regulations have not had a material adverse effect on its results of operations, financial condition or competitive position, to date.

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

CERCLA imposes liability, without regard to fault or the legality of the original conduct, for the release of hazardous substances into the environment. Persons subject to CERCLA include the owner and operator of the disposal site or sites where the release occurred and companies that generated, disposed or arranged for the disposal of the hazardous wastes found at the site. Persons who are responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the resulting contamination and for damages to natural resources. It is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

Certain third-party owned disposal facilities used by the Company or its subsidiaries have been investigated under state and federal Superfund statutes, and the Company is currently named as a potentially responsible party for cleanup at three such sites. Although the Company’s level of involvement varies at each site, in general, the Company is one of numerous parties named and will be obligated to pay an allocated share of the cleanup costs. While it is not feasible to predict the outcome of these matters with certainty, management believes that their ultimate resolution should not result in material costs to the Company or otherwise materially and adversely affect the Company’s operations or financial position.

Employees

At December 31, 2003, the Company had a total of 10,281 employees (of which 1,382 were temporary employees). The Company considers its relations with its employees to be good.

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GLOSSARY OF OILFIELD TERMS

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ITEM 2.    PROPERTIES

The Company operates in over 40 countries. The following table describes the major manufacturing, sales, service, distribution, and administrative facilities:

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

ITEM 3.    LEGAL PROCEEDINGS

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

The Company is involved in numerous legal proceedings which arise in the ordinary course of its business. The Company is unable to predict the outcome of these proceedings; however, management believes that none of these legal proceedings will have a material adverse effect on the results of operations or financial condition of the Company. There can be no absolute assurance that the indemnity from Minstar Inc. (“Minstar”) discussed below or the Company’s insurance coverage will be sufficient to protect the Company from incurring substantial liability as a result of these proceedings.

The Company has been party to two lawsuits that allege wrongful death or injury of former employees resulting from exposure to silica and silica dust during employment with the Company, both of which have been settled. These settlements have been made on the Company’s behalf by the Company’s and Minstar’s insurance carriers without financial loss to the Company. The Company is aware of the possibility that suits may be brought against it by other former employees alleging exposure to silica and silica dust during their employment with the Company. These suits may involve claims for wrongful death under a theory of gross negligence and claims for punitive damages, the amounts of which could be substantial but cannot be predicted. Additionally, the Company has been sued in the past for claims arising out of allegations of exposure to silica, asbestos, benzene and certain other substances alleged to have been used primarily during its processes in the 1960s, 1970s, and early 1980s. The Company believes that, based upon insurance and indemnification from Minstar, any such potential claims, if asserted, would not have a material adverse effect on the Company’s results of operations or financial condition.

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

The Company is a defendant and counter-plaintiff in a litigation styled Lexington Ins. Co. v. Varco International, Inc., Advanced Wirecloth, Inc., Environmental Procedures, Inc. et al. (Cause No. 2001-49363), which was filed in the 164^th District Court for Harris County, Texas on September 25, 2001. Plaintiff is seeking a declaration of its rights and obligations under several insurance policies under which the Company is insured. Specifically, plaintiff is seeking a declaration that it does not owe the Company a duty to pay for its costs of defense or to indemnify the Company for settlement costs incurred in connection with two lawsuits brought by Derrick Manufacturing Corporation, each of which has been settled. Additionally, plaintiff seeks to recover amounts previously paid to the Company as partial payment for its defense of the Derrick Manufacturing cases. The Company disputes the plaintiff’s claims and has asserted counterclaims for breach of the insurance policies, violations of the Texas Insurance Code and Texas Deceptive Trade Practices Act, fraud and common law bad faith. The Company seeks to recover costs incurred in defending and settling the Derrick Manufacturing cases, as well as statutory and punitive damages.

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

No matters were submitted to a vote of stockholders during the fourth quarter of 2003.

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PART II

ITEM 5.     MARKETS FOR REGISTRANT’S COMMON EQUITY STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

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

The closing price of the Company’s common stock on February 20, 2004 was $19.86. The approximate number of stockholders of record on February 20, 2004 was 1,130.

Holders of the Company’s common stock are entitled to such dividends as may be declared from time to time by the Company’s Board of Directors out of funds legally available therefore. The Company has not declared or paid any dividends on its common stock since its inception and does not currently plan to declare or pay any dividends.

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ITEM 6.    SELECTED FINANCIAL DATA

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

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General

Executive Summary

The Company’s oilfield service businesses generally performed well in 2003, but the strength of these businesses was overshadowed by weak results in the Company’s capital equipment businesses. In particular, results of the Drilling Equipment Group suffered from softening demand and cost overruns on a large rig fabrication project.

During 2003, the Company’s service-oriented businesses benefited from rising levels of oilfield activity in several important markets, including North American land drilling, Mexico, the Middle East and the Far East. These benefits were somewhat offset by slightly declining oilfield activity in other key markets, including the U.S. Gulf of Mexico, the North Sea and Venezuela. Demand for the Company’s coiled tubing and fiberglass tubing for oilfield applications strengthened in 2003.

The Company generally experienced declining market conditions during 2003 in its businesses that sell capital equipment to other oilfield service companies, including drilling equipment, solids control equipment, and rig instrumentation equipment. Sales of coiled tubing and wireline equipment were modestly improved, but backlog for the Coiled Tubing and Wireline Products Group turned down at year end. Backlog and revenue for Drilling Equipment generally trended down throughout 2003.

Looking forward, the Company believes worldwide drilling activity should remain strong in 2004, led by North America, Latin America and the Middle East, and that its oilfield service businesses should generally continue to perform well. However, offshore drilling activity, particularly in the Gulf of Mexico and the North Sea, continues to be very slow and has not yet shown signs of improvement. Additionally, the Company expects that the market for premium tubulars, which is dependent in part on the level of drilling “critical” wells (i.e., high-pressure, high-temperature, deep and/or offshore wells), will remain slow in 2004. Premium tubulars for critical wells are more likely to be coated or inspected by the Company than conventional tubulars for shallower, onshore drilling because the cost of tubular failures is much higher for critical wells. Also, the Company expects that the market for new drillpipe will remain slow in 2004, due primarily to an overhang of drillpipe in the market currently. This affects the Company’s tubular coating business because most new drillpipe is coated before it is placed into service.

The Company does not expect the market for capital equipment to strengthen significantly in 2004, and foresees few new drilling rigs being fabricated in 2004. In view of the declining revenue and backlog for the Drilling Equipment Group, the Company has begun a significant restructuring of the Group, as detailed below, to lower its overhead. Additionally, the Company has decided to exit the rig fabrication business, which it entered by acquiring Morinoak International Ltd. (“MIL”) in September 2001. The Company expects that the focus of the Drilling Equipment Group in 2004 will be on downsizing operations; moving manufacturing to more cost efficient locations; launching new products targeting the land drilling contractor market; providing units to upgrade existing drilling rigs; and continuing the Group’s emphasis on aftermarket spares and services business.

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Operating Environment Overview

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

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The following table details the U.S., Canadian, and international rig activity and West Texas Intermediate Oil prices for the three years ended December 31, 2003 on a quarterly basis:

Oil and natural gas prices rose sharply in 2003 compared to 2002. The average price per barrel of West Texas Intermediate Crude was $30.89, an increase of 18.2% over the average for 2002. Natural gas prices were $5.49 per mbtu, an increase of 63.9% compared to the 2002 average. High commodity prices led to the recent improvement in U.S., Canadian, and international rig activity, which began in the second half of 2002, and continued throughout 2003. U.S., Canadian, and international rig activity increased 24.2%, 39.8%, and 5.3%, respectively, for the full year in 2003 compared to 2002. On a combined basis, worldwide rig activity increased 18.9% in 2003 compared to the prior year average. However, rig activity in several key operating locations including the Gulf of Mexico and North Sea have remained sluggish. The Gulf of Mexico rig activity declined from an average of 109 rigs in 2002 to 104 rigs in 2003, while the North Sea average rig count dropped from a 2002 average of 52 rigs to an average of 46 rigs in 2003.

U.S. rig activity at February 20, 2004 was at 1,114 rigs, compared to 1,126 rigs at December 31, 2003. The Company believes that current industry projections are forecasting commodity prices to remain strong as compared to recent years, and, as a result, U.S. and international drilling rig activity is expected to continue to be strong. However, numerous events could significantly alter these projections including political tensions in the Middle East, the acceleration or deceleration of the recovery of the U.S. and world economies, a build up in world oil inventory levels, or numerous other events or circumstances.

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Drilling Equipment Group Restructuring and MIL Impairment Charge

Drilling Equipment Group revenue declined $12.5 million (2.6%) in 2003. Revenue was $474.2 million in 2003 compared to $486.7 million in 2002. The group’s operating profit was down $33.8 million, from $71.6 million in 2002 to $37.8 million in 2003. Operating profit as a percent of revenue declined from 14.7% in 2002 to 8.0% in 2003.

The decline in the Drilling Equipment Group operating profit reflects in part the softening market for capital drilling equipment in 2003 and into 2004, as well as adverse movements in the Company’s mix of drilling equipment unit sales (rig floor equipment and handling tools declined, while pressure control equipment sales increased). As a result of its lowered outlook for rig equipment sales, particularly in the offshore rig construction market, the Company has undertaken a significant restructuring of its Drilling Equipment Group. Plans to reduce its technical and administrative workforce by approximately 200 employees are underway, and should be completed by the end of the second quarter 2004. The Company is consolidating certain sales, engineering and administrative functions of the Drilling Equipment Group from California into Houston, and is moving certain manufacturing operations between its plants to improve efficiency. The Company expects to save approximately $20 million annually in Drilling Equipment Group overhead expenses, and expects to recognize severance, relocation, and facility consolidation charges in the range of $5 million to $10 million related to these measures during the first half of 2004.

The significant decline in Drilling Equipment Group operating profit was also caused by charges taken by its rig fabrication division, MIL. In 2003, MIL recognized $9.4 million in anticipated losses on a turnkey contract to construct a $31 million land drilling rig for the Middle East, and other operating losses of $5.8 million. The $9.4 million loss on the contract was due to (1) the structural complexity of the rig, which required substantially more material, fabrication, engineering and design work than originally planned; (2) underestimation of rig up and commissioning costs; (3) delays in the project which resulted in late delivery penalties; and (4) adverse foreign currency exchange movements with the weakening of the U.S. dollar. Due to this poor financial performance, the Company has decided to exit the rig fabrication business.

Acquired in September of 2001 for $11.8 million, MIL designs, fabricates and assembles structural drilling rig components such as masts, derricks and substructures. The acquisition of MIL was intended to expand the Company’s sales of drilling equipment by packaging the equipment with rigs fabricated by MIL. However, the Company determined that its integrated packages of drilling equipment and structural rig components bore too much risk, and failed to produce a sufficient economic return, and therefore, the Company decided to exit the rig fabrication business and close the MIL facility in Great Yarmouth, England. As a consequence of this decision, the Company recognized a charge of $11.2 million related to goodwill and fixed asset impairments in the fourth quarter of 2003. The combined effect of the impairment charge and losses from operations on earnings per share was a loss of $0.22 per share. The Company expects to incur additional exit costs and operating losses in 2004 related to the winding up of the MIL business.

The MIL operation is expected to be accounted for as a discontinued operation upon its shut down in 2004. The following summarizes the operations of MIL for the years ending December 31, 2003, 2002, and 2001 (in thousands).

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Results of Operations

Year Ended December 31, 2003 vs Year Ended December 31, 2002

Revenue.    The Company’s total revenue was $1,449.6 million in 2003, an increase of $114.5 million (8.6%) over 2002 revenue of $1,335.1 million. The increase was due mainly to the acquisition of ICO’s oilfield services business in September 2002 and increases in the Company’s services business due to the increase in rig activity discussed above. The Company’s Tubular Services business increased $99.9 million (28.1%) and Drilling Services business increased $14.0 million (5.0%) in 2003 compared to 2002. In addition, the Company’s Coiled Tubing and Wireline business was also positively impacted by the increase in activity as revenue increased $13.1 million (6.1%) in 2003 compared to 2002. These results were offset to some extent by a decrease in Drilling Equipment Group revenue of $12.5 million (2.6%) in 2003 compared to 2002, which was primarily related to a decline in the sale of drilling units.

The following table summarizes the Company’s revenue by operating segment in 2003 and 2002 (in thousands):

Revenue from the Company’s Drilling Equipment Group in 2003 was $474.2 million, a decrease of $12.5 million (2.6%) compared to 2002. The decrease was due to declines in shipments of capital equipment, including rig floor equipment, and handling tools of $48.0 million. The Company shipped 56 top drives in 2003 compared to 75 top drives shipped in 2002. These declines were offset by increases in capital equipment sales of pressure control equipment of $19.0 million and increases in aftermarket revenue including spares, service, repair and rental of $17.2 million. New orders for 2003 were $382.6 million compared to $453.3 million for the same period of 2002, while backlog at December 31, 2003 was $126.5 million compared to $218.1 million at December 31, 2002. The decline in orders and backlog was reflective of fewer new rig construction projects and reduced capital investment in rig upgrades and refurbishments by drilling contractors in 2003 compared to 2002. In accordance with industry practice, orders and commitments generally are cancelable by customers at any time.

Revenue from the Company’s Tubular Services was $455.9 million in 2003, an increase of $99.9 million (28.1%) over 2002 results. Acquisitions for 2003 and 2002 resulted in an estimated incremental increase in revenue of approximately $79.8 million in 2003 compared to 2002. The largest acquisition was ICO’s oilfield services business on September 6, 2002. Excluding the impact from these acquisitions, Tubular Services revenue would have increased $21.0 million (5.9%) in 2003 compared to the prior year. The increase in U.S., Canada, and Worldwide oilfield activity resulted in greater non-acquisition revenue from the Company’s Inspection, Coating, and Fiberglass operations in 2003. These increases were slightly offset by lower capital sales from the Company’s Mill equipment sales operations and lower revenue from Pipeline services.

Revenue from the Company’s Drilling Services was $292.7 million in 2003, an increase of $14.0 million (5.0%) compared to 2002 results. The increase was primarily driven by greater revenue from the Company’s U.S. and Canadian Instrumentation and Solid Control businesses, which increased a combined $24.9 million in 2003 compared to 2002. The U.S. and Canadian rig activity was up 24.2% and 39.8%, respectively, in 2003 compared to 2002. These increases were partially offset by lower revenue from the Company’s Solids Control and Instrumentation capital equipment sales divisions, and lower revenue from Venezuela operations which was a result of economic and political troubles in that country.

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Coiled Tubing and Wireline Products revenue was $226.9 million in 2003, an increase of $13.1 million (6.1%) in 2003 compared to 2002. The increase was primarily due to greater revenue from Company’s Quality Tubing operations, which were up $9.2 million in 2003 as a result of the increased oilfield activity discussed above. In addition, the Company’s Coiled Tubing and Wireline business was up $3.9 million in revenue also benefiting from increased activity. Coiled Tubing and Wireline Products backlog at December 31, 2003 was $37.0 million, a decline of $12.1 million (24.6%) compared to December 31, 2002.

Gross Profit.    Gross profit was $393.5 million (27.1% of revenue) in 2003 compared to $383.0 million (28.7% of revenue) in 2002. The increase in gross profit dollars was due to the $114.5 million (8.6%) increase in revenue. The decrease in gross profit percent was due to lower margins in the Drilling Equipment Group discussed above and operating losses related to the MIL operations.

Selling, General, and Administrative Costs.    Selling, general, and administrative costs were $180.8 million in 2003, an increase of $17.5 million (10.7%) over 2002 costs of $163.4 million. The increase was due primarily to the acquisitions in 2003 and 2002. In addition, the Company’s insurance costs, legal expenses, and fringe benefit costs were also greater in 2003 than 2002. As a percent of revenue, selling, general, and administrative costs were 12.5% of revenue in 2003 compared to 12.2 % of revenue in 2002.

Research and Engineering Costs.    Research and engineering costs were $61.5 million in 2003, an increase of $4.4 million (7.8%) compared to 2002 results. The increase was spread out between all four major operating segments and was primarily related to new product development and integration, and acquisitions completed in 2003 and 2002.

Merger, Transaction, Impairment and Litigation Costs.    Merger, transaction, impairment, and litigation costs were $11.2 million and $6.5 million for December 31, 2003 and 2002, respectively. The impairment charge of $11.2 million was related to goodwill and fixed asset impairments associated with the MIL operations in the fourth quarter 2003. The 2002 costs consisted of two components; $3.7 million of transaction costs associated with the acquisition of substantially all of the oilfield services business of ICO (see Note 3 of Notes to Consolidated Financial Statements) and $2.8 million of severance costs.

Operating Profit.    Operating profit was $140.0 million for 2003 compared to $156.1 million for 2002. Excluding merger, transaction, impairment and litigation costs, operating profit was $151.2 million (10.4% of revenue) for 2003 compared to $162.6 million (12.2% of revenue) for 2002. The 2003 operating profit included losses from the MIL operations (excluding impairment charges) of $14.9 million. Excluding MIL operations, operating profit was $166.1 million, or 11.6% of revenue in 2003. The decline in operating profit percent in 2003 compared to 2002 was due to weak margins in the Drilling Equipment Group discussed above. Operating profit percents in Drilling Services and Coiled Tubing and Wireline both improved in 2003, while Tubular Services was approximately flat as compared to 2002.

Interest Expense.    Interest expense was $30.2 million in 2003 compared to $25.6 million in 2002. The increase in interest expense was due to greater average outstanding debt balances as a result of the $150.0 million Senior Notes issued in November 2002.

Other Expense (Income).    Other expense includes interest income, foreign exchange losses and gains, and other expense (income). Net other expense was $2.2 million in 2003 compared to $7.7 million in 2002. The improvement in other expense in 2003 was primarily due to $5.2 million in foreign exchange losses in 2002 compared to a $1.1 million gain in 2003. The 2002 losses occurred in the third quarter of 2002 due mostly to foreign exchange losses in Venezuela, the second quarter of 2002 due mostly to the weakening of the U.S. dollar against the euro dollar and UK pound sterling, and the first quarter 2002 due mostly to foreign exchange losses in Argentina as a result of the devaluation of the Argentine peso in the first quarter of 2002.

Provision for Income Taxes.    The Company recorded a tax provision of $40.3 million (37.5% of pre-tax income) and $43.0 million (35% of pre-tax income) for the years ended December 31, 2003 and 2002,

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respectively. The 2003 tax provision was higher than the domestic tax rate of 35% due to deductions not allowed under domestic and foreign jurisdictions related to the asset impairment charge on its investment in its drilling rig fabrication business, and to foreign earnings subject to tax rates differing from domestic rates. The Company partially offset these increases by the benefit from its utilization of the extraterritorial income provisions, increased research and development credits and the resolution of a prior year tax audit.

The European Union has put into place a process to begin imposing sanctions on U.S. exports effective March 1, 2004, if Congress does not repeal the extraterritorial tax regime (“ETI”). There are proposals before the U.S. Senate and U.S. House of Representatives, but no resolution has been determined as of February 2004. The Company has utilized the ETI regime in prior years in reducing its U.S. tax attributable to its export sales. The repeal of the ETI regime would have an adverse impact on the net income in the range of $0.2 million to $2.5 million on the projected 2004 export sales by the Company. It is not determinable the impact of the export sanctions would have on the Company’s operating profit.

Net Income.    Net income was $67.2 million and $79.8 million for 2003 and 2002, respectively. The decrease in net income was due to the factors discussed above.

Year Ended December 31, 2002 vs Year Ended December 31, 2001

Revenue.    Revenue for the year ended December 31, 2002 was $1,335.1 million, an increase of $67.3 million, or 5.3%, from revenue of $1,267.8 million for the year ended December 31, 2001. The increase in revenue was primarily due to acquisitions completed in 2002 and 2001, and the shipment of several large drilling equipment packages in 2002.

The following table summarizes the Company’s revenue by operating segment in 2002 and 2001 (in thousands):

Revenue from the Company’s Drilling Equipment Group in 2002 was $486.7 million, an increase of $91.1 million (23.0%) compared to 2001. The increase was due to the shipment of several major rig projects totaling $99.5 million in 2002 compared to $44.6 million for major projects in 2001. Due to these major projects and to the shipment of other units, the Company shipped a record number of 75 top drives in 2002 compared to 59 top drives in 2001. In addition, 2002 revenue was up approximately $9.2 million due to the Company’s September 2001 acquisition of Morinoak International Limited Group (MIL), a manufacturer of derricks, substructures and other structural drilling rig components. New orders for 2002 were $453.3 million compared to $545.9 million for the same period of 2001, while backlog at December 31, 2002 was $218.1 million compared to $251.5 million at December 31, 2001. The decline in orders and backlog was reflective of the lower market activity in 2002 compared to 2001. In accordance with industry practice, orders and commitments generally are cancelable by customers at any time.

Revenue from the Company’s Tubular Services was $356.0 million in 2002, an increase of $3.3 million (0.9%) over 2001 results. Acquisitions for 2002 and 2001 resulted in an estimated incremental increase in revenue of approximately $43.5 million in 2002 compared to 2001. The largest acquisition was ICO’s oilfield services business on September 6, 2002. Excluding the impact from these acquisitions, Tubular Services revenue would have declined $40.2 million (11%) in 2002 compared to 2001. The major reason for the non acquisition

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decline was lower rig activity in the U.S., which was down 28.1% in 2002 compared to 2001. This resulted in a decrease of $28.0 million (25.3%) in U.S. inspection and coating revenue (excluding the impact from acquisitions). In addition, lower rig activity resulted in a $15.3 million decline in revenue from the Company’s Fiberglass operations in 2002 compared to 2001 (excluding the estimated impact of $7.7 million in revenue from acquisitions).

Revenue from the Company’s Drilling Services was $278.6 million in 2002, a decrease of $35.7 million (11%) compared to 2001 results. Excluding the estimated impact from 2001 acquisitions, revenue would have been down $41.6 million (13%) in 2002. The decline was mainly due to a $10.3 million decline in North America Solids Control revenue and a $24.8 million decline in Latin America revenue. The decline in North America Solids Control revenue was due to a 26.7% drop in North America rig activity. Lower Latin America revenue was concentrated primarily in Venezuela and Argentina as a result of economic and political troubles in those countries. In addition, the Company’s Instrumentation revenue decreased $12.3 million in 2002 due to the decrease in worldwide drilling activity, primarily in North America.

Coiled Tubing and Wireline Products revenue was $213.8 million in 2002, an increase of $8.4 million in 2002 compared to 2001. The increase was due to the acquisition of three companies in 2001, which contributed estimated incremental revenue of approximately $32.1 million in 2002 compared to 2001. Excluding the estimated impact of these acquisitions, Coiled Tubing and Wireline Products revenue would have decreased $23.7 million (12%) in 2002 compared to 2001. The lower market activity resulted in lower revenue in the Company’s Coiled Tubing related products. Coiled Tubing and Wireline Products backlog at December 31, 2002 was $49.1 million, a decline of $6.8 million (12%) compared to December 31, 2001 further reflecting the declining market activity in 2002. However, sequentially from the third quarter of 2002, backlog increased $8.2 million (20%) due to the recent increase in market activity discussed above.

Gross Profit.    Gross profit was $383.0 million (28.7% of revenue) in 2002 compared to $373.5 million (29.5% of revenue) in 2001. The increase in gross profit dollars was due to no amortization of goodwill in 2002 compared to $10.5 million of goodwill amortization in 2001. The Company applied SFAS 142, the new rule on accounting for goodwill and other intangible assets, in the first quarter of 2002. See Note 2 of Notes to the Consolidated Financial Statements for further discussion. Excluding the impact of goodwill amortization, gross profit would have been $384.0 million (30.3% of revenue) in 2001. Excluding the impact of goodwill amortization, gross profit percents declined due to lower revenue from the Company’s higher margin services business segments (Tubular Services and Drilling Services—see discussion above).

Selling, General, and Administrative Costs.    Selling, general, and administrative costs were $163.4 million in 2002, an increase of $11.1 million (7%) over 2001 costs of $152.3 million. The increase was due primarily to the acquisitions in 2002 and 2001. In addition, the Company’s insurance costs and fringe benefit costs were also greater in 2002 than 2001. As a percent of revenue, selling, general, and administrative costs were 12.2% of revenue in 2002 compared to 12.0 % of revenue in 2001.

Research and Engineering Costs.    Research and engineering costs were $57.1 million in 2002, an increase of $10.4 million (22%) compared to 2001 results. The increase was primarily due to greater costs in the Drilling Equipment Group and the acquisitions completed in 2002 and 2001.

Merger, Transaction, and Litigation Costs.    Merger, transaction, and litigation costs were $6.5 million and $16.5 million for December 31, 2002 and 2001, respectively. The 2002 costs consisted of two components; $3.7 million of transaction costs associated with the acquisition of substantially all of the oilfield services business of ICO (see Note 3 of Notes to Unaudited Consolidated Financial Statements) and $2.8 million of severance costs resulting from early termination of employment agreements for several senior executives arising out of the May 2000 merger between Varco and Tuboscope. During the second quarter of 2001, the Company engaged in a court ordered mediation and as a result recorded a $16.5 million charge concerning a patent litigation matter, which has been settled.

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Operating Profit.    Operating profit was $156.1 million for 2002 compared to $158.1 million for 2001. Excluding merger, transaction, and litigation costs, operating profit was $162.6 million (12.2% of revenue) for 2002 compared to $174.6 million (13.8% of revenue) for 2001. The decrease in operating profit and margin was due to an unfavorable product mix and generally weaker oil and gas market conditions, in 2002 compared to 2001 as discussed in detail above.

Interest Expense.    Interest expense was $25.6 million in 2002 compared to $21.8 million in 2001. The increase in interest expense was due to greater average outstanding debt balances as a result of the $200.0 million Senior Notes issued in May 2001 and the $150.0 million Senior Notes issued in November 2002.

Other Expense (Income).    Other expense includes interest income, foreign exchange losses and gains, and other expense (income). Net other expense was $7.7 million in 2002 compared to $4.3 million in 2001. The increase in other expense in 2002 was primarily due to greater foreign exchange losses. The losses occurred in the third quarter of 2002 due mostly to foreign exchange losses in Venezuela, the second quarter of 2002 due mostly to the weakening of the U.S. dollar against the euro dollar and UK pound sterling, and the first quarter 2002 due mostly to foreign exchange losses in Argentina as a result of the devaluation of the Argentina peso in the first quarter of 2002.

Provision for Income Taxes.    The Company recorded a tax provision of $43.0 million (35.0% of pre-tax income) and $49.1 million (37.2% of pre-tax income) for the years ended December 31, 2002 and 2001, respectively. The 2001 tax provision was higher than the domestic tax rate of 35% due to deductions not allowed under domestic and foreign jurisdictions related to merger and transaction costs, and goodwill amortization and to foreign earnings subject to tax rates differing from domestic rates.

Net Income.    Net income was $79.8 million and $83.0 million for 2002 and 2001, respectively. The decrease in net income was due to the factors discussed above.

Financial Condition and Liquidity

At December 31, 2003, the Company had cash and cash equivalents of $85.7 million, and total debt of $456.9 million. At December 31, 2002 cash and cash equivalents were $106.0 million, and total debt was $467.9 million. The Company’s outstanding debt at December 31, 2003 consisted of $201.2 million of 7¼% Senior Notes due 2011, $149.3 million of 5½% Senior Notes due 2012, $95.3 million of 7½% Senior Notes due 2008, and other debt of $11.1 million.

For the fiscal year ended December 31, 2003, cash provided by operating activities was $100.8 million compared to $101.8 million for 2002. Cash was provided by operations primarily through net income of $67.2 million plus non-cash charges of $97.0 million. In addition, cash was provided by an increase in accounts payable and accrued liabilities of $12.6 million. The increase in accounts payable and accrued liabilities was due to an increase in insurance accruals, employee benefit accruals, and acquisition related accruals. These items were offset by an increase in inventory of $64.2 million, and an increase in accounts receivable of $10.8 million. The increase in inventory was related primarily to the construction of a land drilling rig for a customer, as well as an increase in Drilling Equipment and Coiled Tubing & Wireline inventory. The increase in accounts receivable was due to an increase in days sales outstanding, which was up from 83.9 days outstanding at December 31, 2002 to 87.3 days outstanding at December 31, 2003.

For the fiscal year ended December 31, 2003, cash used for investing activities was $106.6 million compared to $202.3 for the same period of 2002. The Company used approximately $39.0 million of cash for 13 acquisitions during 2003 and cash paid in 2003 for 2002 acquisitions. See Note 3 of Notes to the Consolidated Financial Statements. Capital spending of $67.1 million was primarily related to rental equipment for the Company’s Solids Control operations and Top Drive businesses, Tubular Services ultrasonic inspection equipment, and $12.9 million of purchased facilities and equipment previously leased.

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For the fiscal year ended December 31, 2003, the Company used $15.2 million of cash for financing activities. Cash was used for net payments on outstanding debt of $8.5 million and the purchase of treasury stock of $15.0 million. This use of cash was offset to some degree with proceeds from the sale of stock of $8.4 million.

On January 30, 2002 the Company entered into a credit agreement with a syndicate of banks that provided up to $125.0 million of funds under a revolving credit facility and $5 million under a bilateral letter of credit facility with a separate bank. The agreement was amended on September 5, 2002 with the available revolving funds increased to $150.0 million. The facility expires on January 30, 2005. The facility is secured by guarantees of material U.S. subsidiaries. The interest rate on the borrowed portion of the revolver is based on the Company’s rating by S&P and Moody’s, which at the time of the agreement resulted in an interest rate of Libor + 0.625% or the prime rate. Commitment fees range from 0.1% to 0.25% depending on the Company rating. At December 31, 2003, there were $139.1 million of funds available under the revolving credit facility and $2.5 million of funds available under the bilateral letter of credit facility, with $10.9 million and $2.5 million being used for letters of credit, respectively. The Company also has $17.0 million of additional outstanding letters of credit at December 31, 2003 that is not secured by the Company’s senior credit facility.

The Company believes that its December 31, 2003 cash and cash equivalents, its outstanding credit facility, and cash flow from operations will be sufficient to meet its capital expenditures and its operating cash needs for the foreseeable future.

A summary of the Company’s outstanding contractual obligations at December 31, 2003 is as follows (in thousands):