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SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

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 $2,046,641,296 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 11, 2005 was 98,468,554

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2005 Annual Meeting are incorporated by this reference into Part III, as set forth herein.

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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 equipment and rig instrumentation; performs inspection and internal coating of oilfield tubular products; 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 oil and gas 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, Tubular Services, Drilling Services, and Coiled Tubing & Wireline Products.

The Drilling Equipment group manufactures and sells 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, sucker rods, 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 oilfield, industrial, and marine 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, major oil companies, and independent producers.

In January 2004, the Company announced its plans to discontinue its Morinoak International Ltd (MIL) rig fabrication operation in England. The MIL rig fabrication business was closed during the first quarter of 2004. As a result, the prior year MIL results have been reclassified to report this operation as discontinued, and 2001, 2002, and 2003 results have been restated herein to reflect the reclassification. There is no impact on 2000 results as MIL was purchased in 2001. Previously these results were included as part of the Drilling Equipment group operations.

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

On August 11, 2004, the Company entered into an Agreement and Plan of Merger with National-Oilwell, Inc. (National Oilwell) whereby the Company will merge with and into National Oilwell. Under the terms of the agreement, each outstanding share of the Company’s common stock will be converted into the right to receive 0.8363 of a share of National Oilwell common stock. National Oilwell will assume all options outstanding under the Company’s stock option plans and each outstanding option to purchase the Company’s common stock will be converted into an option to purchase National Oilwell common stock, subject to certain adjustments to the exercise price and the number of shares issuable upon exercise of those options to reflect the exchange ratio. In the event of a termination of the agreement under certain circumstances, Varco may be required to pay National Oilwell a termination fee of $75 million.

The completion of the merger is subject to several conditions, including the approval of the merger agreement by the stockholders of the Company and National Oilwell and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. National Oilwell and Varco have responded to the Antitrust Division of the U.S. Department of Justice’s request for additional information issued under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and continue to work with the Justice Department regarding the proposed merger between the companies. Closing of the proposed merger is expected to occur as quickly as possible after regulatory clearance and stockholder approvals are received. A special meeting of the stockholders of Varco to approve the merger has been scheduled for March 11, 2005.

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.

In 2004, approximately 40% of the Company’s Drilling Equipment group’s revenues resulted from 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 60% of the Drilling Equipment group’s revenue in 2004 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.

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The majority of the Company’s Tubular Service group’s revenues are directly related to the level of demand for oil country tubular goods, which is determined by the level of drilling, completion, and well servicing activity (which use 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 that cause operators to 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 pipe inspection equipment to the manufacturers of oil country tubular goods, which is indirectly related to drilling activity, in the Company’s view. Since the services provided by this group tend to prolong the useful life of steel tubular products, demand for the services may be impacted by steel costs.

The Company’s Drilling Services group’s revenues are closely tied to drilling activity, although a portion 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 group’s 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 completion and 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 servicing equipment, which the Company believes are generally determined directly by the level of well completion and remediation activity.

Drilling and well servicing 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; steel prices and fabrication costs; 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. 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 resulting in declining backlogs for Drilling Equipment and Coiled Tubing & Wireline products through the year. High oil and gas prices led to steadily rising levels of drilling activity generally in 2004, driving the world-wide rig count up 10% compared to the prior year. Drilling activity increased in the U.S. land market, Latin America, the Middle East and the Far East. However, the Gulf of Mexico, Canada, Africa, and the North Sea saw Drilling activity decline in 2004 compared to 2003. As a result of higher cash flows realized by many drilling contractors and other oilfield service companies, market conditions for capital equipment purchases improved significantly in 2004, resulting in higher backlogs for the Company at the end of 2004 compared to the end of 2003.

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, 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.

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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, and applies “hardbanding” material to drillpipe to improve its wear characteristics.

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 equipment 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. The Company’s Drilling Equipment group sells and services blowout preventers.

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 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, or operators sometimes pump fluids into wells to inhibit corrosion.

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

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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 steel 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 equipment 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. The Drilling Equipment group sells directly to drilling contractors, rig fabricators, national oil companies, major and independent oil and gas companies, supply stores, and pipe-running service providers. 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 2004, approximately 14 percent of the Drilling Equipment group’s sales were of equipment for newly constructed drilling rigs, 20 percent were for upgrades and refurbishments of existing rigs, 60 percent were for aftermarket spares and services, and 6 percent 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, 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 2004, approximately 171 TDS units, or 74% 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 can be 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 2004 the Company has sold approximately 174 units.

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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 registered trademark Shaffer^®. 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 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, rig-time, and space savings. Its unique features make subsea operation more efficient through faster ram configuration changes without tripping the BOP stack. In 2004, Varco introduced the LXT, which features many of the design elements of the NXT, but is targeted at the land market. During 2004, the Company shipped 7 LXTs and received orders for 47 LXTs.

The conventional BOP 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 in 2005. This device enables drilling contractors to make and break drill pipe connections without stopping the circulation of drilling fluids. This in turn increases drilling efficiency.

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.

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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 $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 exited the rig fabrication business of MIL in 2004. Accordingly, the financial results of MIL are reported as a discontinued operation.

Service & Spares. Approximately 60 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 American Block; Canrig (a division of Nabors Industries); Cavins Oil Tools; Cooper Cameron Corporation; DenCon Oil Tools; Hydril Company; LEWCO (a division of Rowan Companies); 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, availability of products, spare parts, and consumables, and 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 and composite tubing to oil and gas producers, national oil companies, drilling contractors, well servicing 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 internal coating of tubular goods at several 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-service 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.

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

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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 and turbulence.

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. The Company also acquired 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 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 2004, the Company acquired the assets of Total Premier Services, a pipe-threading operation in Houston, Texas.

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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^™ and Gold^™) 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,^TM 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 pipe 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 11 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 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 which provides ultrasonic pipeline inspection technology. As part of the investment the Company obtained certain exclusive rights to market a new ultrasonic pipeline inspection service, which was introduced commercially in late 2003 and which contributed significantly to the Pipeline Services Group’s 2004 results.

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 Engineering, GmbH; T.D. Williamson, Inc.; Baker Hughes; Diascan; Magpie; Weatherford; 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

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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, availability of products, spare parts, and consumables, and 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 under the Brandt brand name. The Company believes the 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. In certain markets the Company’s Solid Control business has been adversely affected by recent customer trends toward awarding contracts which combine both Solids Control services and Drilling Fluids provision. In such instances, which primarily occur in certain international areas the Company bids to Drilling Fluid providers, or bids jointly with Drilling Fluids providers.

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 also provides “screens” which are mounted on shale shakers and act as a filter. Screens are consumables which must be replaced every several days. The Company recycles certain screen components for reuse. 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 Recovery Systems, Ltd., a provider of thermal desorption cuttings processing services in Lowestoft, England, in 2004.

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. In 2004, the Company acquired the business of JB Equipment, a provider of drying units in the Gulf of Mexico.

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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, 2004, approximately 39 percent of the Drilling Services group’s solids control revenue was generated from the sale of solids control equipment and inventory, and approximately 61 percent 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 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. In 2004, the Company acquired the rig instrumentation businesses of Wildcat Services and Wellsite Gas Detection, Inc.

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, most 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.; Fluid System; 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 and technology, 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

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drum and in and out of a wellbore. In addition, the small size of the coiled tubing 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 Texas Equipment and Service Co, which manufactures coiled tubing equipment.

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. Its manufacturing facilitiesare located in Poole and Aberdeen, in the United Kingdom; Perth, Australia; Dubai; Houston, Texas; 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

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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); ASEP; National-Oilwell Inc.; Crown Energy Technologies; Baker Hughes Industries; Foremost Group; FID Group; Rolligon; Cromar, Ltd.; Hunt & Hunt; The Titan Group; Vanoil; Parveen Industries; and several smaller competitors.

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2004 Acquisitions

In 2004, the Company made the following acquisitions and outside investments:

The Company paid an aggregate purchase price of $43.7 million ($33.2 million in cash and $10.5 million of notes payable) for acquisitions and outside investments in 2004, and paid $3.8 million in cash in 2004 related to transactions closed before 2004.

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. In the past years these businesses 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 2004, the business declined approximately $10.5 million in revenue and $6.8 million in operating profit from the first quarter to the second quarter. In past years, the business rebounded in the third and fourth quarter. Tubular Services activity in both the United States and Canada sometimes 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 & Composite Tubulars 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.

The Company anticipates that the seasonal trends described above will continue. However, there can be no guarantee that spending by the Company’s customers will continue to follow patterns seen in the past or that spending by 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; tubular installation service providers; 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.

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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; 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; drilling contractors; providers of drilling fluids; and other oilfield service companies. 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 independent providers of pressure pumping and well remediation services. 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, 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 servicing 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, 2004, the Company held a substantial number of United States patents and had several patent applications pending. Expiration dates of such patents range from 2005 to 2020. As of this 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

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steel, and the availability and price 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 facilities in New Iberia, Louisiana; Conroe, Texas; Aberdeen, Scotland; Canada; Trinidad; and Brazil. The Company manufactures solids control equipment at its facilities in Houston, Texas; Conroe, Texas; and Aberdeen, Scotland; and manufactures instrumentation equipment at its Cedar Park, Texas; and Houston, Texas facilities.

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 Suzhou, China facilities, while tubular coatings are manufactured in its Houston, Texas facility, or through restricted sale agreements with third party manufacturers.

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 generally available from multiple 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 experienced higher steel prices and greater difficulty securing necessary steel supplies in 2004 than it experienced during the preceding several years. The Company has generally been successful in its effort to mitigate the financial impact of higher raw materials costs on its operations by applying surcharges to and adjusting prices on the products it sells. However, higher prices and lower availability of steel and other raw material the Company uses in its business may adversely impact future periods.

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, 2004, 2003, and 2002 was as follows (in millions):

The Company expects that most of the backlog as of December 31, 2004 will be shipped by December 31, 2005.

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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 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 four 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, 2004, the Company had a total of 10,572 employees (of which 1,651 were temporary employees). The Company considers its relations with its employees to be good. Approximately 122 employees in the Company’s Fiberglass & Composite Tubulars plants in Little Rock, Arkansas, are subject to collective bargaining agreements. Additionally, certain of the Company’s employees in certain foreign locations, principally Norway and Argentina, are subject to collective bargaining agreements.

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GLOSSARY OF OILFIELD TERMS

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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.

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.

No matters were submitted to a vote of stockholders during the fourth quarter of 2004.

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PART II

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 11, 2005 was $33.70. The approximate number of stockholders of record on February 11, 2005 was 1,004.

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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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 business showed steadily strengthening results throughout the year in 2004, due primarily to rising drilling and workover activity in the oilfield markets it serves; an improving level of investment in capital equipment by drilling contractors and other oilfield service firms; and the financial impact of a significant restructuring of the Company’s Drilling Equipment Group which commenced in the second half of 2003. Overall the Company generated a record level of revenue ($1,568.1 million) and operating profit ($198.4 million) from continuing operations in 2004.

The count of rigs actively drilling around the world increased each quarter of 2004, as compared to the corresponding quarter of 2003, which led the Company’s Tubular Service and Drilling Services Groups to post higher year-over-year revenues each quarter. The effect of eight acquisitions in 2004 and 13 acquisitions in 2003 also contributed to the higher sales level. Order levels and revenues for the Company’s Drilling Equipment Group moved up significantly from recent lows set in the fourth quarter of 2003, as drilling contractors increased levels of spending on aftermarket spare parts and services to support their operations, and new equipment to refurbish or upgrade rigs. These drilling contractors generally increased their purchases in response to the higher drilling activity levels and dayrates they received for their rigs in 2004. Likewise, the Company’s Coiled Tubing & Wireline Products Group also experienced generally rising demand for its equipment and consumables throughout 2004. The Coiled Tubing & Wireline Products Group set new order rate records in three out of the four quarters of 2004, and ended the year with a record level of backlog.

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The following table summarizes the Company’s revenue from continuing operations by operating segment in 2004 and 2003 (in million):

Results for the year included the exit and closure of the Company’s Morinoak International Ltd. (“MIL”) rig fabrication business in early 2004, due to large losses on a rig fabrication project, and continuing losses from the operation generally. The Company’s 2001 through 2003 results have been restated to account for MIL as a discontinued operation. The Company’s consolidated results reflect significant charges associated with the completion of the land rig fabrication project, the completion of other projects at MIL, and the final closure of the business in the first quarter of 2004. The Company’s third quarter 2004 results reflect a gain in its discontinued operation related to the favorable negotiation of a contractual issue associated with the land rig fabrication project.

The Company’s fourth quarter 2004 results include $5.0 million in charges related to the Company’s proposed merger with National Oilwell. Unallocated overhead expenses for the Company increased approximately $7.5 million in 2004 compared to 2003, primarily due to higher levels of incentive compensation expense, which increased $8.0 million from the prior year.

Each of the four quarters of 2004 include charges related to the Company’s restructuring of its Drilling Equipment Group, commenced in mid-2003. These charges totaled $5.7 million in 2004 and $0.9 million in 2003, and consist primarily of severance obligations.

Drilling Equipment Group: Operating profit from the continuing operations of the Group, excluding restructuring charges of $5.7 million, improved $11.8 million in 2004 from the prior year, primarily as a result of the Company’s reduction of fixed costs in the business due to the restructuring. This improvement was accomplished in spite of a decline in revenue from continuing operations of the Group of $16.8 million or four percent compared to the prior year.

Group continuing operations revenue in 2003 compared to 2004 was higher due primarily to the Company’s 2003 shipments of equipment ordered between 2001 and 2002. These older orders were generally more complex than recent orders, due to the Company’s more recent strategic decision to standardize a number of product designs, and better manage technical design and manufacturing risk. Despite the higher volume of continuing operating revenue in 2003, the Group’s operating margin fell short of the Company’s stated 15 percent goal. As a result, the Company undertook a restructuring of the Group, which was executed between the third quarter of 2003 and the fourth quarter of 2004.

Compared to 2003, engineering, sales and administrative expenses declined $18.0 million, excluding restructuring charges. On an annualized basis the savings are expected to be approximately $20 million. The overhead cost reduction initiatives were complemented by initiatives to reduce manufacturing costs by moving certain assembly and machining functions related to the Group’s pipe handling equipment line into the Company’s lower cost manufacturing operation in Mexicali, Mexico.

The operating margin of the Drilling Equipment Group’s continuing operations, excluding restructuring charges, moved up steadily through 2004 as these initiatives were executed, and as demand grew. Operating margins from continuing operations and excluding Group restructuring charges increased from 8.0 percent in the fourth quarter of 2003, to 9.2 percent, 14.0 percent, 16.2 percent and 18.1 percent through the four quarters of 2004, respectively. The Company was able to exceed its stated operating margin goal of 15 percent by the third quarter of 2004, approximately six months earlier than its original plan. While the Group experienced sharply higher steel costs in 2004, it has generally been successful in mitigating the impact by charging surcharges on the products it sells. Nevertheless, continued increases in steel prices or other commodities could adversely impact the Group’s margins in the future. Backlog for the Group at year end was $140.8 million, compared to $83.3 million at the end of 2003, indicative of the improving market conditions benefiting the Drilling Equipment Group.

The Drilling Equipment Group benefited from the Company’s strategy enacted a few years ago to improve the availability of aftermarket spare parts and services for its customers. The Group’s 2004 results reflect a 15 percent improvement in its aftermarket business as a result of this strategy and of higher drilling activity levels. Varco has also continued to invest heavily in new products, and expects to introduce a new product which will alleviate the need to break circulation while making drillpipe connections. This device, called the Continuous Circulation System, has tested well in field trials, and promises to permit the drilling of wells through high pressure zones with minimal formation damage and lower risk. Other new products the Group has introduced over the last several quarters continue to find high demand in the marketplace, such as the ST-80 iron roughneck and the LXT blowout preventer.

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Tubular Services: The Group set records for revenue and operating profit in 2004, as it benefited from brisk drilling and workover activity in several major markets; high production levels by drillpipe makers, pipe mills and pipe processors; recent acquisitions; and higher demand for used pipe and sucker rod reclamation services driven by sharply higher steel pipe prices. As a result of these, the Company’s OCTG inspection and coating businesses posted record levels of revenue and operating profit in 2004. Group results also benefited from record revenue results from both its pipeline inspection business, and its fiberglass and composite pipe sales business. Sales of the Company’s mill equipment also reported strong results, as steel pipe mills in the Eastern Hemisphere and Latin America invested in new equipment to support their expanding operations.

Tubular Services Group revenue grew 18 percent or $81.0 million from 2003 to 2004. Group operating profit improved $24.8 million, representing 31 percent operating leverage (incremental operating profit divided by incremental revenue) year-over-year.

The year started slowly following an extended shutdown of pipe mills over the holiday season in late 2003. Production levels for many domestic pipe mills and pipe processors remained slow through January and February, but rebounded sharply in March, benefiting the Group’s business. Pipe mill and pipe processor business continued to strengthen through the year, as levels of drilling and workover activity improved, which fueled demand for OCTG around the globe. Additionally, the market for new drillpipe began improving in early 2004 as drilling contractors increased capital investment in new drillstrings to support their operations. The Group inspects, and applies internal coating and hardbanding to much of the new drillpipe manufactured around the world. Margins in the Group’s Eastern Hemisphere inspection business were adversely impacted by the weaker U.S. dollar.

Stronger year-over-year sales of fiberglass and composite tubulars were primarily the result of higher sales of linepipe into corrosive oilfield applications. Sales of composite pipe into other industrial applications was up slightly. The Group’s margins in this business have recently been adversely impacted by higher raw material pricing, which the Group is seeking to mitigate through higher product pricing. The Group’s pipeline inspection business benefited from the introduction of its new ultrasonic inspection technology in late 2003, and from higher revenues from its pipeline logistics business. This business also posted higher revenues from its high-resolution MFL inspection services in the Western Hemisphere.

Drilling Services: The Drilling Services Group also generated record revenue in 2004, due to greater levels of drilling activity and the effect of acquisitions. Compared to 2003, revenues increased $46.2 million or 16 percent. Operating profit improved $4.2 million, representing nine percent operating leverage on the incremental revenue performance.

Year-over-year results benefited from sharply higher results across its North America operations, particularly in its rig instrumentation sales and services business, and the Company’s acquisition of two rig instrumentation businesses. Group results were also adversely impacted by the lower sales of high margin solids control equipment in Latin America; losses on an equipment sale in the Eastern Hemisphere; the Company’s acquisition of two thermal desorption drill-cuttings treatment businesses at lower margins; and the weakening of the US dollar against the British Pound and Euro. Sales of solids control and rig instrumentation equipment were down compared to 2003, primarily as a result of lower sales of the Group’s V-ICIS product.

Solids control results in North America generally strengthened through the year, particularly in the Mid-continent and Rocky Mountain areas. Canada operations were adversely impacted by wet weather in the third quarter, but recovered strongly in the fourth quarter. Latin America solids control operations strengthened in the second half, following the termination of a handful of large contracts in the first half. Improving results from Venezuela offset declines in Mexico. The Group’s solids control operations have been impacted by trends in certain Latin American and Eastern Hemisphere markets by some customers awarding solids control contracts in conjunction with drilling fluids services, which the Company does not offer in those markets. The Group has addressed this development by bidding to or with other providers of drilling fluids on certain tenders, and by offering the highest quality solids control technology and services.

Coiled Tubing & Wireline Products: The Coiled Tubing & Wireline Products Group achieved record levels of revenue, operating profit, orders and backlog during 2004. Revenues improved $20.0 million or 9 percent compared to 2003. Operating profit increased $5.0 million, representing 25 percent operating leverage on the revenue increase.

The Coiled Tubing & Wireline Products Group benefited from higher levels of orders for its nitrogen pumping equipment to North America and the Middle East; higher sales of coiled tubing to support increased well remediation activity around the world, higher levels of coiled tubing drilling in Canada, and North American gas completions; and higher sales of tubing-conveyed perforating gun bodies. Additionally, the Group’s new QT-16Cr corrosion-resistant coiled tubing product contributed to the year-over-year increase. Demand for the Group’s products generally continued to rise through the year as major pressure pumping contractors increased purchases of equipment.

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The Group’s strong results were partly due to higher levels of coalbed methane drilling in North America, which often utilizes high-rate nitrogen vaporization and pumping equipment to dewater wells and initiate gas production. Group margins were somewhat adversely impacted by the weakening U.S dollar against the British Pound, which generally increased the costs of the Group’s Elmar manufacturing plant in the U.K. Additionally, the Group has been adversely impacted by longer component delivery times, and higher steel costs year-over-year, but has for the most part mitigated the effects by increasing the prices of the products it sells. Nevertheless, continuing increases in steel prices or other commodities could adversely affect margins in the future.

Outlook: Based upon the sustained high levels of commodity prices as compared to the last two decades, increasing dayrates for onshore and offshore rigs in recent months, and plans to increase spending by many oil and gas companies, the Company believes that the high level of oilfield activity should continue into 2005. Additionally, the beginning level of backlog in 2005 is strong for both the Company’s Drilling Equipment Group (which increased 69 percent during 2004) and Coiled Tubing & Wireline Products Group (which increased 165 percent during 2004). Consequently, the Company believes that its sales of capital equipment to drilling contractors and oilfield service companies should continue to strengthen into the coming year as well. Additionally, the Company believes that higher cashflows to drilling contractors as a result of higher rig dayrates may improve the environment for new rig construction.

The Company’s business will likely continue to be impacted by certain seasonal factors in its business in 2005. Specifically, its pipeline inspection business will likely decline significantly in the first quarter, since most of its customers across the Northern Hemisphere curtail their pipeline inspection activities during the winter to permit them to maximize the volumes of gas and fuel through their pipeline systems to satisfy winter heating demand. First quarter results will probably also be adversely affected by seasonal declines in the Company’s fiberglass pipe manufacturing operation in China. Second quarter results are likely to be impacted by seasonal “breakup” in the Company’s Canadian inspection, coating, solids control and rig instrumentation businesses.

Although important markets for the Company such as the Gulf of Mexico, the North Sea, and Venezuela continue to operate at activity levels well below previous peaks, the Company believes that some or all of these markets may improve in 2005, given the overall strength of the industry as we enter the new year.

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: