**EXHIBIT 10.3****SMITH INTERNATIONAL, INC.****NONSTATUTORY OPTION AGREEMENT****OPTIONEE:  «Full_Legal_Name»**     **1. ****Grant of Stock Option****.**As of the **Grant Date**(identified in Section 2below), Smith International, Inc. (the “**Company**”) hereby grants a Nonstatutory Stock Option (the“**Option**”) to the **Optionee**, an employee of the Company and/or one or more of its Subsidiaries, topurchase the number of shares of the Company’s common stock, $1.00 par value per share (the “**CommonStock**”), identified in Section 2 below (the “**Shares**”), subject to the terms and conditionsof this agreement (the “**Agreement**”) and the Smith International, Inc. 1989 Long-Term IncentiveCompensation Plan, as amended and restated effective January 1, 2005 (the “**Plan**”). The Plan ishereby incorporated herein in its entirety by reference. The Shares, when issued to Optionee uponthe exercise of the Option, shall be fully paid and nonassessable. The Option is not an “incentivestock option” as defined in Section 422 of the Internal Revenue Code.     **2. ****Definitions and Other Terms****.**The following capitalized terms shall have thosemeanings set forth opposite them:         (a) Optionee: **«Full_Legal_Name»**         (b) Grant Date: **«Grant_Date»**         (c) Shares: **«Shares_Granted»**Shares of the Company’s Common Stock.         (d) Option Price: $**«Price»**per Share.         (e) Option Period: **«Grant_Date»**through **«Expire_Date»**(until 5:00 p.m. CST).         (f) Vesting Schedule: Options as follows:       **Date**   **Options Vesting**         **«Vest_Date1»**   **«Shares1»**         **«Vest_Date2»**   **«Shares2»**         **«Vest_Date3»**   **«Shares3»**         **«Vest_Date4»**   **«Shares4»**                  Total **«Shares_Granted»**      ================       **3. ****Definitions****.**All capitalized terms used herein shall have the meanings set forth inthe Plan unless otherwise provided herein. Section 2 sets forth meanings for certain of thecapitalized terms used in this Agreement.     **4. ****Option Term****.**The Option shall commence on the Grant Date (identified inSection 2 above) and terminate on the tenth (10th) anniversary of the Grant Date asspecified in Section 2. The period during which the Option is in effect and may beexercised is referred to herein as the **“Option Period”**.     **5. ****Option Price****.**The Option Price per Share is identified in Section 2.     **6. ****Vesting****.**The total number of Shares subject to this Option shall vest inaccordance with the **Vesting Schedule**(described in Section 2). The Shares may be purchasedat any time after they become vested, in whole or in part, during the Option Period; provided,however, the Option may only be exercisable to acquire whole Shares. The right of exerciseprovided herein shall be cumulative so that if the Option is not exercised to the maximum extentpermissible after vesting, the vested portion of the Option shall be exercisable, in whole or inpart, at any time during the Option Period.
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     **7. ****Method of Exercise****.**The Option is exercisable by delivery of a written notice tothe Secretary of the Company, signed by the Optionee or delivered via email communication from averifiable email address of the Optionee, specifying the number of Shares to be acquired on, andthe effective date of, such exercise. The Optionee may withdraw notice of exercise of this Option,in writing, at any time prior to the close of business on the business day preceding the proposedexercise date.     **8. ****Method of Payment****.**Subject to applicable provisions of the Plan, the Option Priceupon exercise of the Option shall be payable to the Company in full either: (i) in cash or itsequivalent; (ii) subject to prior approval by the Committee in its discretion, by tenderingpreviously acquired Shares having an aggregate Fair Market Value (as defined in the Plan) at thetime of exercise equal to the total Option Price (provided that the Shares must have been held bythe Optionee for at least six (6) months prior to their tender to satisfy the Option Price); or(iii) any other permitted method pursuant to the applicable terms and conditions of the Plan.     As soon as practicable after receipt of a written notification of exercise and full payment,including any applicable taxes as described in Section 17 below, the Company shall deliverto or on behalf of the Optionee, in the name of the Optionee or other appropriate recipient, Sharecertificates or other evidence of ownership for the number of Shares purchased under the Option.     **9. ****Restrictions on Exercise****.**The Option may not be exercised if the issuance of suchShares or the method of payment of the consideration for such Shares would constitute a violationof any applicable federal or state securities or other laws or regulations, or any rules orregulations of any stock exchange on which the Common Stock may be listed. In addition, Optioneeunderstands and agrees that the Option cannot be exercised if the Company determines that suchexercise, at the time of such exercise, will be in violation of the Company’s insider tradingpolicy.     **10. ****Termination of Employment****.**Voluntary or involuntary termination of Employmentshall affect Optionee’s rights under the Option as follows:     (a) Termination for Cause. The entire Option, including any vested portionthereof, shall expire on 12:01 a.m. (CST) on the date of termination of Employment and shallnot be exercisable to any extent if Optionee’s Employment is terminated for Cause (asdefined in the Plan at the time of such termination of Employment).     (b) Death or Disability. If Optionee’s Employment is terminated by death orDisability (as defined in the Plan at the time of such termination of Employment), then (i)the Option shall become fully vested as of such date of termination and (ii) the Optionshall expire on the date that is three (3) years after such date of termination ofEmployment (to the extent not exercised by Optionee) or, in the case of death, by the personor persons to whom Optionee’s rights under the Option have passed by will or by the laws ofdescent and distribution or, in the case of Disability, by Optionee or Optionee’s legalrepresentative. In no event may the Option be exercised by anyone on or after the earlierof (i) the expiration of the Option Period or (ii) three years after the date of Optionee’sdeath or termination of Employment due to Disability.     (c) Involuntary Termination Without Cause. If Optionee’s Employment isterminated involuntarily by the Company without Cause, then (i) the non-vested portion ofthe Option shall immediately expire on the termination of Employment date; and (ii) thevested portion of the Option shall expire to the extent not exercised within one (1) yearafter such termination date. In no event may the Option be exercised by anyone after theearlier of (i) the expiration of the Option Period or (ii) one (1) year after thetermination of Employment date even if Optionee becomes deceased during such period.     (d) Voluntary Termination. If Optionee’s Employment is terminated due tovoluntary resignation, then (i) the non-vested portion of the Option shall immediatelyexpire on the termination of Employment date and (ii) the vested portion of the Option shallexpire to the extent not exercised within ninety (90) calendar days after such terminationdate. In no event may the Option be exercised by anyone after the earlier of (i) theexpiration of the Option Period or (ii) ninety (90) calendar days after the termination ofEmployment date even if Optionee becomes deceased or disabled during such period.     **11. ****Independent Legal and Tax Advice****.**Optionee acknowledges that the Company hasadvised Optionee to obtain independent legal and tax advice regarding the grant and exercise of theOption and the disposition of any Shares acquired thereby.
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     **12. ****Reorganization of Company****.**The existence of the Option shall not affect in anyway the right or power of the Company or its stockholders to make or authorize any or alladjustments, recapitalizations, reorganizations or other changes in Company’s capital structure orits business, or any merger or consolidation of the Company, or any issue of bonds, debentures,preferred or prior preference stock ahead of or affecting the Shares or the rights thereof, or thedissolution or liquidation of the Company, or any sale or transfer of all or any part of its assetsor business, or any other corporate act or proceeding, whether of a similar character or otherwise.     **13. ****Adjustment of Shares****.**In the event of stock dividends, spin-offs of assets orother extraordinary dividends, stock splits, combinations of shares, recapitalizations, mergers,consolidations, reorganizations, liquidations, issuances of rights or warrants and similartransactions or events involving Company, appropriate adjustments shall be made to the terms andprovisions of the Option as provided in the Plan. However, such adjustments shall not result inthe Option being considered to be deferred compensation subject to Code Section 409A, unlessotherwise determined at the discretion of the Company.     **14. ****No Rights in Shares****.**Optionee shall have no rights as a stockholder in respect ofthe Shares until the Optionee becomes the record holder of such Shares.     **15. ****Investment Representation****.**Optionee will enter into such written representations,warranties and agreements as Company may reasonably request in order to comply with any federal orstate securities law. Moreover, any stock certificate for any Shares issued to Optionee hereundermay contain a legend restricting their transferability as determined by the Company in itsdiscretion. Optionee agrees that Company shall not be obligated to take any affirmative action inorder to cause the issuance or transfer of Shares hereunder to comply with any law, rule orregulation that applies to the Shares subject to the Option.     **16. ****No Guarantee of Employment****.**The Option shall not confer upon Optionee any rightto continued employment with the Company or any affiliate thereof.     **17. ****Withholding of Taxes****.**To the extent that the exercise of the Option hereunderresults in compensation income to Optionee for federal, state or local income tax purposes,Optionee shall deliver to Company at such time the sum that the Company requires to meet its taxwithholding obligations under applicable law or regulation.     **18. ****General****.**     (a) Notices. Unless provided otherwise herein, all notices under thisAgreement shall be mailed or delivered by hand to the parties at their respective addressesset forth beneath their signatures below or at such other address as may be designated inwriting by either of the parties to one another, or to their permitted transferees ifapplicable. Notices shall be effective upon receipt.     (b) Transferability of Option. The Option is transferable only to the extentpermitted under the Plan at the time of transfer (i) by will or by the laws of descent anddistribution, (ii) by a qualified domestic relations order (as defined in Code Section414(p), or (iii) to Optionee’s Immediate Family or entities established for the benefit of,or solely owned by, the Optionee’s Immediate Family to the extent permitted under the Plan.No right or benefit hereunder shall in any manner be liable for or subject to any debts,contracts, liabilities, obligations or torts of Optionee or any permitted transfereethereof.     (c) Amendment and Termination. No amendment, modification or termination ofthis Agreement shall be made at any time without the written consent of Optionee andCompany.     (d) No Guarantee of Tax Consequences. The Company makes no commitment orguarantee that any tax treatment will apply or be available to Optionee or any other person.The Optionee has been advised, and provided with the opportunity, to obtain independentlegal and tax advice regarding the grant and exercise of the Option and the disposition ofany Shares acquired thereby.     (e) Severability. In the event that any provision of this Agreement shall beheld illegal, invalid, or unenforceable for any reason, such provision shall be fullyseverable, but shall not affect the remaining provisions of the Agreement, and the Agreementshall be construed and enforced as if the illegal, invalid, or unenforceable provision hadnot been included herein.
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     (f) Supersedes Prior Agreements. This Agreement shall supersede and replaceall prior agreements and understandings, oral or written, between the Company and theOptionee regarding the grant of the Options covered hereby.     (g) Governing Law. The Option shall be construed in accordance with the lawsof the State of Texas, without regard to its conflict of law provisions, to the extentfederal law does not supersede and preempt Texas law.     **IN WITNESS WHEREOF**, the Company, as of the Grant Date, has caused this Agreement to beexecuted on its behalf by its duly authorized officer and Optionee has hereunto executed thisAgreement as of the same date.       **SMITH INTERNATIONAL, INC.**       **By:**         **Name:**         **Title:**              **Optionee:**            **Signature**
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