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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-K


|   |  |                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2005                                                  
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from          to                                               

Commission file number: 000-31579


HYDRIL COMPANY


(Exact name of registrant as specified in its charter)


|                                                                                             |  |                                         
|-------------------------------------------------------------------------------------------- |  | ----------------------------------------
|DELAWARE                                                                                     |  | 95-2777268                              
|(State or other jurisdiction of
    incorporation or organization)                           |  | (I.R.S. Employer
    Identification No.)
|                                                                                            
|3300 NORTH SAM HOUSTON PARKWAY EAST
     HOUSTON, TX(Address of principal executive offices) |  | 77032-3411(Zip Code)                    

(281) 449-2000










þ o


o þ


þ o


S-K 10-K 10-K. þ


12b-2


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12b-2 o þ






|                                                                            |  |                                       
|--------------------------------------------------------------------------- |  | --------------------------------------
|Class                                                                       |  | Outstanding at February 28, 2006      
|                                                                            |  |                                       
|Common Stock, $.50 par value per share
    Class B common stock outstanding |  | 20,421,436 shares
    3,279,920 shares

DOCUMENTS INCORPORATED BY REFERENCE


|                                                                                                                                  |  |                              
|--------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------
|Document                                                                                                                          |  | Parts Into Which Incorporated
|                                                                                                                                  |  |                              
|Proxy Statement for the Registrants 2006
    Annual Meeting of Stockholders to be filed
    within 120 days of December 31, 2005 |  | Portions of Part III         









---



##### 










HYDRIL COMPANY


Form 10-K


For the Year Ended December 31, 2005


Index


|                                                         |  |                                                                                                        |    |      |    | 
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                                                         |  |                                                                                                        |    | Page |   
|                                                         |  |                                                                                                        |    |      |   
|Part I                                                  
|Item 1.                                                  |  | Business                                                                                               |    |      | 4  | 
|Item 1A.                                                 |  | Risk Factors                                                                                           |    |      | 14 | 
|Item 1B.                                                 |  | Unresolved Staff Comments                                                                              |    |      | 23 | 
|Item 2.                                                  |  | Properties                                                                                             |    |      | 24 | 
|Item 3.                                                  |  | Legal Proceedings                                                                                      |    |      | 24 | 
|Item 4.                                                  |  | Submission of Matters to a Vote of Security
    Holders                                                |    |      | 25 | 
|Item S-K 401(b)                                          |  | Executive Officers of the Registrant                                                                   |    |      | 25 | 
|Part II                                                 
|Item 5.                                                  |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer of Equity Securities |    |      | 26 | 
|Item 6.                                                  |  | Selected Financial Data                                                                                |    |      | 27 | 
|Item 7.                                                  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations              |    |      | 28 | 
|Item 7A.                                                 |  | Quantitative and Qualitative Disclosures
    About Market Risk                                         |    |      | 41 | 
|Item 8.                                                  |  | Financial Statements and Supplementary
    Data                                                        |    |      | 42 | 
|Item 9.                                                  |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure               |    |      | 73 | 
|Item 9A.                                                 |  | Controls and Procedures                                                                                |    |      | 73 | 
|Item 9B.                                                 |  | Other Information                                                                                      |    |      | 73 | 
|Part III                                                
|Item 10.                                                 |  | Directors and Executive Officers of the
    Registrant                                                 |    |      | 73 | 
|Item 11.                                                 |  | Executive Compensation                                                                                 |    |      | 73 | 
|Item 12.                                                 |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters     |    |      | 74 | 
|Item 13.                                                 |  | Certain Relationships and Related
    Transactions                                                     |    |      | 74 | 
|Item 14.                                                 |  | Principal Accounting Fees and Services                                                                 |    |      | 74 | 
|Part IV                                                 
|Item 15.                                                 |  | Exhibits and Financial Statement
    Schedules                                                         |    |      | 74 | 
|Signatures                                               |  |                                                                                                        | 77 |     
|Description of Non-Employee Director Compensation       
|Subsidiaries of the Registrant                          
|Consent of Independent Registered Public Accounting Firm
|Powers of Attorney                                      
|Certification of CEO Pursuant to Rule 13a-14(a)         
|Certification of CFO Pursuant to Rule 13a-14(a)         
|Certification of CEO Pursuant to Section 906            
|Certification of CFO Pursuant to Section 906            





Cautionary Statement Regarding Forward-Looking Information


This annual report contains forward-looking statements. These
statements relate to future events or our future financial
performance, including our business strategy and product
development plans, and involve known and unknown risks and
uncertainties. These risks and uncertainties include, but are
not limited to, competition from steel mills, limitations on the
availability of pipe for threading, the impact of imports of
tubular goods and of international and domestic trade laws, the
loss of or change to distribution methods of premium connections
in the U.S. and Canada, the consolidation of end-users, the
risks associated with


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fixed-price contracts, the impact of changes in oil and
natural gas prices and worldwide and domestic economic
conditions on drilling activity and demand for and pricing of
Hydrils products, the ability to attract and retain
skilled labor and Hydrils ability to successfully develop
new technologies and products and maintain and increase its
market share. Please read ITEM 1A  RISK
FACTORS for more information about many of these risks and
uncertainties. These factors may cause our companys or our
industrys actual results, levels of activity, performance
or achievements to be materially different from those expressed
or implied by the forward-looking statements. In some cases, you
can identify forward-looking statements by terminology such as
may, will, should,
could, expects, intends,
plans, anticipated, believes
estimated potential, or the negative of
these terms or other comparable terminology.


These statements are only projections, based on anticipated
industry activity. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance
or achievements.


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PART I





ITEM 1  BUSINESS




10-K, 10-Q, 8-K


OVERVIEW OF OUR INDUSTRY










4



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Market for Premium Connections






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|     |  |                |     |  |                |  |     |                |  |  |     | 
|---- |  | -------------- | --- |  | -------------- |  | --- | -------------- |  |  | --- | 
|     |  | Average United |     |  | Average Gulf   |  |     |               
|     |  | States Rig     |     |  | Of Mexico      |  |     | Average        | 
|     |  | Count Over     |     |  | Rigs Under     |  |     | International  | 
|     |  | 15,000 ft(1)   |     |  | Contract(2)    |  |     | Rig Count(3)   | 
|     |  |                |     |  |                |  |     |                | 
|Year |  | Number of Rigs |     |  | Number of Rigs |  |     | Number of Rigs | 
|     |  |                |     |  |                |  |     |                | 
|2001 |  |                | 161 |  |                |  | 164 |                |  |  | 745 | 
|2002 |  |                | 128 |  |                |  | 127 |                |  |  | 732 | 
|2003 |  |                | 143 |  |                |  | 124 |                |  |  | 771 | 
|2004 |  |                | 170 |  |                |  | 118 |                |  |  | 836 | 
|2005 |  |                | 186 |  |                |  | 130 |                |  |  | 908 | 






|    |                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Source: Average rig count calculated by Hydril using weekly data
    published by Smith International.                                                                                                                                                                                      
|   
|(2) | Source: Average rigs under contract calculated by Hydril using
    weekly data published by ODS-Petrodata Group.                                                                                                                                                                            
|   
|(3) | Source: Average rig count calculated by Hydril using monthly
    data published by Baker Hughes Incorporated. The international
    rig count includes data for Europe, the Middle East, Africa,
    Latin America and Asia Pacific, and excludes data for Canada and
    the United States.



Market for Pressure Control Equipment








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|     |  |                |     |  |                  |  |       | 
|---- |  | -------------- | --- |  | ---------------- |  | ----- | 
|     |  | Average        |     |  |                 
|     |  | Worldwide      |     |  | Average United   | 
|     |  | Offshore Rig   |     |  | States Total Rig | 
|     |  | Count(1)       |     |  | Count(2)         | 
|     |  |                |     |  |                  | 
|Year |  | Number of Rigs |     |  | Number of Rigs   | 
|     |  |                |     |  |                  | 
|2001 |  |                | 378 |  |                  |  | 1,156 | 
|2002 |  |                | 344 |  |                  |  | 830   | 
|2003 |  |                | 338 |  |                  |  | 1,032 | 
|2004 |  |                | 342 |  |                  |  | 1,192 | 
|2005 |  |                | 363 |  |                  |  | 1,383 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Source: Average rig count calculated by Hydril using weekly data
    for the United States and Canada, and monthly data for the
    international regions, as published by Baker Hughes
    International. The worldwide offshore rig count includes data
    for Europe, the Middle East, Africa, Latin America, Asia
    Pacific, the United States and Canada, and excludes the former
    Soviet Union and China.
|   
|(2) | Source: Average rig count calculated by Hydril using weekly data
    published by Baker Hughes Incorporated.                                                                                                                                                                                                                                                                                                         

BUSINESS SEGMENTS


Our Premium Connection Business










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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pressure tight sealing. Our metal-to-metal pressure tight
    sealing is designed to prevent both gas and fluid leakage, a
    critical factor in the case of extreme pressure and
    environmentally sensitive drilling.                                                                                                                                                                                                                                                                                                                                
|
| |  | Tension resistance. Our premium integral thread designs
    have high tension strength, which supports the weight of
    numerous sections of pipe strung together in deep wells.                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Torque capability. Our premium thread connection, in
    particular our proprietary Wedge
    Threadtm
    connection, is designed to have torque capability that
    approaches pipe body strength in casing applications and
    surpasses it in most drill pipe and tubing applications. This
    design prevents connection damage due to overtorque, facilitates
    easier assembly and disassembly and reduces wear and tear from
    recurring service to the pipe.                                                                               
|
| |  | Clearance. Our integral connections are machined directly
    onto the pipe, forming a smooth connection with little or no
    increase in diameter of the pipe. Coupled connections, on the
    other hand, use a bulkier third pipe, or coupling, to make a
    connection, resulting in less clearance inside the well. This
    integral quality is particularly important in deep drilling
    where well diameters become increasingly narrow because multiple
    strings of casing, production tubing, or drill pipe are utilized
    in one well.
|
| |  | Compression and bending flexibility. Our premium threads
    are designed to permit greater compression and bending of pipe
    strings than standard connections, which is particularly
    important in horizontal and extended-reach wells.                                                                                                                                                                                                                                                                                                            
|
| |  | Corrosion resistance. Our unique manufacturing processes
    and designs reduce the propensity for galling, especially when
    applied to corrosion resistant materials, and extend the useful
    life of the connections and drill string. Our corrosion barrier
    ring, when used on plastic coated tubing connections, provides
    the entire tubing string with continuous internal protection
    from corrosive well bore fluids and also extends the useful life
    of the connections and tubing string.                                    
|
| |  | Uniformity and compatibility. Our connections are
    manufactured worldwide with the same design, high tolerance
    specifications, and centrally manufactured tools and gauges,
    which enhances product uniformity and compatibility.                                                                                                                                                                                                                                                                                                               



Our Pressure Control Business






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| |                          
| | -------------------------
| | Pressure Control Products

Blowout preventers.






| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Annular blowout preventers, which we invented more than
    65 years ago, seal the well by hydraulically closing a
    large rubber collar around the drill pipe or against itself if
    nothing is in the well.
|
| |  | Ram blowout preventers seal the well by hydraulically driving
    metal rams against each other across the top of the well.                                                                                      

Control Systems.


Integrated Systems.


Diverters.


Drill Stem Valves.


Pulsation Dampeners.


Production Chokes.


Elastomers.


9



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| |                                  
| | ---------------------------------
| | Aftermarket Products and Services





Research and Development










Our Customers, End-Users and Distribution




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Premium Connection Products.










Pressure Control Products.




Our Competitors




Premium Connection Products.


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Pressure Control Products.


Our Employees






Insurance






Environmental Regulation






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International and Other Matters






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ITEM 1A  RISK FACTORS






| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may lose premium connection business to international
    and domestic competitors who produce their own pipe, as well as
    other new entrants or lose business due to limitations on the
    availability of pipe for threading.







| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The level and pricing of tubular goods imported into the
    United States and Canada could adversely affect demand for our
    products and our results of operations.





| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | United States and worldwide demand for tubular goods;                        
|
| |  | the trade practices of and government subsidies to foreign
    producers; and
|
| |  | the presence or absence of antidumping and countervailing duty
    orders.   



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| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on a few distributors for sales of our premium
    connections in the United States and Canada; a loss of one or
    more of our distributors or a change in the method of
    distribution could adversely affect our ability to sell our
    products.









| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidation or loss of end-users of our products could
    adversely affect demand for our products and services and reduce
    our revenue.





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| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may lose money on fixed price contracts, which
    currently constitute a significant part of our business, and
    such contracts could cause our quarterly revenue and earnings to
    fluctuate significantly.





| |   |                                                            
| | - | -----------------------------------------------------------
| |  | changes in cost, estimates or expected production time;    
|
| |  | engineering design changes;                                
|
| |  | changes requested by customers; and                        
|
| |  | changes in the availability and cost of labor and material.



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| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Intense competition in our industry could result in
    reduced profitability and loss of market share for us.





| |   |                                                  
| | - | -------------------------------------------------
| |  | availability and capabilities of the equipment;  
|
| |  | ability to meet the customers delivery schedule;
|
| |  | price and indexes affecting price;               
|
| |  | pipe costs and their impact on contract prices;  
|
| |  | reputation;                                      
|
| |  | experience;                                      
|
| |  | safety record; and                               
|
| |  | technology.                                      









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| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A material or extended decline in expenditures by the oil
    and gas industry, due to a decline in oil and gas prices or
    other economic factors, would reduce our revenue.









| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the level of worldwide oil and gas exploration and production
    activity;                                                                                                                                                             
|
| |  | worldwide demand for energy, which is affected by worldwide
    economic conditions;                                                                                                                                                    
|
| |  | the policies of the Organization of Petroleum Exporting
    Countries, or OPEC;                                                                                                                                                         
|
| |  | significant decreases or increases in the production of oil or
    gas from countries due to war or civil unrest, such as in Iraq,
    Nigeria or Venezuela;                                                                            
|
| |  | the cost of producing oil and gas;                                                                                                                                                                                                      
|
| |  | interest rates and the cost of capital;                                                                                                                                                                                                 
|
| |  | technological advances affecting hydrocarbon consumption,
    particularly oil and gas;                                                                                                                                                 
|
| |  | environmental regulation;                                                                                                                                                                                                               
|
| |  | level of oil and gas inventories in storage;                                                                                                                                                                                            
|
| |  | tax policies, including windfall profit taxes on oil
    and gas companies, which have recently been proposed in the
    United States Congress;                                                                                      
|
| |  | extended disruptions of oil and gas drilling and production,
    refining or pipeline operations as a result of weather-related
    factors, such as hurricanes or tropical storms in the Gulf of
    Mexico or other natural disasters;
|
| |  | policies of national governments; and                                                                                                                                                                                                   
|
| |  | war, civil disturbances and political instability.                                                                                                                                                                                      





| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Our international operations may experience severe
    interruptions due to political, economic and other risks.



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| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | political instability, civil disturbances, war and terrorism;                                  
|
| |  | nationalization, expropriation, and nullification of contracts;                                
|
| |  | changes in regulations and labor practices;                                                    
|
| |  | changes in currency exchange rates and potential devaluations;                                 
|
| |  | changes in currency restrictions which could limit the
    repatriations of profits or capital;
|
| |  | restrictive actions by local governments;                                                      
|
| |  | seizure of plant and equipment; and                                                            
|
| |  | changes in foreign tax laws.                                                                   

day-to




| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to attract and retain skilled labor, the
    results of our manufacturing and services activities will be
    adversely affected.





| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The occurrence or threat of terrorist attacks could have
    an adverse affect on our results and growth prospects, as well
    as on our ability to access capital and obtain adequate
    insurance.



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| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | High fixed costs in the pressure control industry could
    exacerbate the level of price competition for our products,
    adversely affecting our business and revenue.





| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not develop new technologies and products that
    are commercially successful, our revenue may decline or we may
    be required to write-off any capitalized investment.





| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | design and commercially produce products that meet the needs of
    our customers;
|
| |  | successfully market new products; and                                             
|
| |  | obtain and maintain patent protection.                                            



start-up




| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Limitations on our ability to protect our intellectual
    property rights could cause a loss in revenue and any
    competitive advantage we hold.



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| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | The loss of any member of our senior management and other
    key employees may adversely affect our results of
    operations.





| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Our quarterly sales and earnings may vary significantly,
    which could cause our stock price to fluctuate.





| |   |                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the level of drilling activity worldwide, as well as the
    particular geographic focus of the activity;                                                                                                                                                                                                                                      
|
| |  | the variability of customer orders, which are particularly
    unpredictable in international markets;                                                                                                                                                                                                                                         
|
| |  | the mix of our products sold and the margins on those products;                                                                                                                                                                                                                                                                                
|
| |  | new products offered and sold by us or our competitors;                                                                                                                                                                                                                                                                                        
|
| |  | weather conditions or other natural disasters that can affect
    our operations or our customers operations, such as
    Hurricanes Katrina, Rita and Stan, which disrupted operations at
    our Gulf Coast facilities, in particular at our Westwego,
    Louisiana facility, as well as the operations of our customers
    in the region;
|
| |  | changes in commodity prices and currency exchange rates, which
    in some cases affect the costs and prices for our products;                                                                                                                                                                                                                 
|
| |  | pipe costs and their impact on contract prices;                                                                                                                                                                                                                                                                                                
|
| |  | delays in the delivery or other limitations on the availability
    of plain-end pipe from steel mills for threading by us for our
    customers;                                                                                                                                                                                              
|
| |  | the level of long-term capital equipment project orders which
    varies with the level of new rig construction and refurbishment
    activity in the industry;                                                                                                                                                                                
|
| |  | changes in drilling and exploration plans which can be
    particularly volatile in international markets; and                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | delays in the delivery of finished products to customers due to
    limitations on the availability of marine transportation,
    particularly internationally.





| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | We could be subject to substantial liability claims, which
    would adversely affect our results and financial
    condition.







| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in regulation or environmental compliance costs
    and liabilities could have a material adverse effect on our
    results and financial condition.





| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could become subject to claims related to the release
    of hazardous substances which could adversely affect our results
    and financial condition.



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| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Liability to customers under warranties may materially and
    adversely affect our earnings.





| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Excess cash is invested in marketable securities which may
    subject us to potential losses.






ITEM 1B  UNRESOLVED STAFF COMMENTS




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ITEM 2  PROPERTIES




|                                        |  |                |         |  |             |                                                                                     
|--------------------------------------- |  | -------------- | ------- |  | ----------- | ------------------------------------------------------------------------------------
|                                        |  | Approximate    |         |  |            
|                                        |  | Square Footage |         |  |            
|Location                                |  | (Buildings)    |         |  | Description
|                                        |  |                |         |  |            
|United States                           |  |                |         |  |             |                                                                                     
|Houston, Texas                          |  |                | 238,540 |  |             | Pressure control products manufacturing; principal executive
    offices.           
|Houston, Texas                          |  |                | 179,000 |  |             | Premium connection manufacturing.                                                   
|Houston, Texas                          |  |                | 100,000 |  |             | Pressure control elastomer products manufacturing.                                  
|Westwego, Louisiana                     |  |                | 40,000  |  |             | Premium connection manufacturing.                                                   
|Bakersfield, California (leased)        |  |                | 8,000   |  |             | Premium connection manufacturing; warehouses pressure control
    replacement parts.
|International                           |  |                |         |  |             |                                                                                     
|Veracruz, Mexico                        |  |                | 124,000 |  |             | Premium connection manufacturing.                                                   
|Nisku, Alberta, Canada (leased)         |  |                | 48,000  |  |             | Premium connection manufacturing.                                                   
|Pipe Nagar, Maharashtra, India(1)       |  |                | 30,000  |  |             | Premium connection manufacturing.                                                   
|Batam, Indonesia (land is leased)       |  |                | 30,000  |  |             | Premium connection manufacturing.                                                   
|Veracruz, Mexico                        |  |                | 21,200  |  |             | Thread protector manufacturing for premium connections.                             
|Warri, Nigeria                          |  |                | 20,000  |  |             | Repair and service of premium connections.                                          
|Aberdeen, Scotland                      |  |                | 20,000  |  |             | Premium connection manufacturing; warehouses pressure control
    replacement parts.
|Dartmouth, Nova Scotia, Canada (leased) |  |                | 15,600  |  |             | Premium connection manufacturing.                                                   
|New Mills, England (leased)             |  |                | 10,000  |  |             | Pressure control products manufacturing.                                            






|    |                                                               
|--- | --------------------------------------------------------------
|(1) | This facility is owned by a joint venture of which we own 50%.






ITEM 3  LEGAL PROCEEDINGS




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







ITEM S-K 401(b)  EXECUTIVE OFFICERS OF THE
REGISTRANT




|                         |  |     |    |  |             |                                                                                             
|------------------------ |  | --- | -- |  | ----------- | --------------------------------------------------------------------------------------------
|Name                     |  | Age |    |  | Position(s)
|                         |  |     |    |  |            
|Richard C. Seaver        |  |     | 83 |  |             | Chairman of the Board                                                                       
|Christopher T. Seaver    |  |     | 57 |  |             | President, Chief Executive Officer and Director                                             
|Charles E. Jones         |  |     | 46 |  |             | Executive Vice President and Chief Operating Officer                                        
|Neil G. Russell          |  |     | 60 |  |             | Senior Vice President-Premium Connections and Senior Vice
    President-Business Development
|E. Charles Chauviere III |  |     | 41 |  |             | Vice President-Pressure Control                                                             
|Chris D. North           |  |     | 50 |  |             | Chief Financial Officer and Secretary                                                       

Richard C. Seaver


Christopher T. Seaver


Charles E. Jones


Neil G. Russell


E. Charles Chauviere III


Chris D. North


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PART II





ITEM 5  MARKET FOR THE REGISTRANTS
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS




|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|               |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|2004           |  |      |       |  |     |   |       | 
|First Quarter  |  | $    | 28.00 |  |     | $ | 22.98 | 
|Second Quarter |  |      | 31.95 |  |     |   | 24.37 | 
|Third Quarter  |  |      | 44.16 |  |     |   | 30.70 | 
|Fourth Quarter |  |      | 47.62 |  |     |   | 38.82 | 
|2005           |  |      |       |  |     |   |       | 
|First Quarter  |  | $    | 63.18 |  |     | $ | 41.36 | 
|Second Quarter |  |      | 64.58 |  |     |   | 46.37 | 
|Third Quarter  |  |      | 70.66 |  |     |   | 53.59 | 
|Fourth Quarter |  |      | 71.48 |  |     |   | 55.43 | 





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ITEM 6  SELECTED FINANCIAL
DATA


10-K.


|                    |                                                              |                                       |         |               |         |        |         |         |         |        |         |         |         |        |         |         |         |        |         |         |         |        |         | 
|------------------- | ------------------------------------------------------------ | ------------------------------------- | ------- | ------------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | 
|                    |                                                              | Years Ended December 31,              |        
|                    |                                                              |                                       |        
|                    |                                                              | 2005                                  |         |               | 2004    |        |         | 2003    |         |        | 2002    |         |         | 2001   |        
|                    |                                                              |                                       |         |               |         |        |         |         |         |        |         |         |         |        |        
|                    |                                                              | (In thousands, except per share data) |        
|Operating Data:     |                                                              |                                       |         |               |         |        |         |         |         |        |         |         |         |        |         |         |         |        |         |        
|                    | Revenue:                                                     |                                       |         |               |         |        |         |         |         |        |         |         |         |        |         |         |         |        |         |         |        
|                    |                                                              | Premium connection                    |         | $             | 246,470 |        |         | $       | 184,782 |        |         | $       | 110,270 |        |         | $       | 127,116 |        |         | $       | 138,887 |       
|                    |                                                              | Pressure control                      |         |               | 130,254 |        |         |         | 100,571 |        |         |         | 101,747 |        |         |         | 114,408 |        |         |         | 100,674 |       
|                    |                                                              |                                       |         |               |         |        |         |         |         |        |         |         |         |        |        
|                    |                                                              |                                       |         | Total revenue |         |        | 376,724 |         |         |        | 285,353 |         |         |        | 212,017 |         |         |        | 241,524 |         |         |        | 239,561 | 
|                    | Gross profit                                                 |                                       |         | 163,563       |         |        |         | 118,413 |         |        |         | 81,893  |         |        |         | 90,670  |         |        |         | 84,217  |        
|                    | Selling, general and administration Expenses                 |                                       |         | 58,607        |         |        |         | 52,007  |         |        |         | 47,730  |         |        |         | 46,345  |         |        |         | 41,887  |        
|                    |                                                              |                                       |         |               |         |        |         |         |         |        |         |         |         |        |        
|                    | Operating income                                             |                                       |         | 104,956       |         |        |         | 66,406  |         |        |         | 34,163  |         |        |         | 44,325  |         |        |         | 42,330  |        
|                    | Interest expense(1)                                          |                                       |         |              |         |        |         |        |         |        |         | 1,101   |         |        |         | 4,831   |         |        |         | 4,403   |        
|                    | Interest income                                              |                                       |         | 3,900         |         |        |         | 1,113   |         |        |         | 724     |         |        |         | 1,477   |         |        |         | 2,874   |        
|                    | Other income (expense)(2)                                    |                                       |         | 724           |         |        |         | (335    | )       |        |         | (135    | )       |        |         | (214    | )       |        |         | (1,082  | )      
|                    | Net income(3)                                                |                                       | $       | 73,243        |         |        | $       | 46,487  |         |        | $       | 25,578  |         |        | $       | 26,492  |         |        | $       | 25,619  |        
|                    | Earnings per share:                                          |                                       |         |               |         |        |         |         |         |        |         |         |         |        |         |         |         |        |         |         |        
|                    |                                                              |                                       | Basic   |               | $       | 3.12   |         |         | $       | 2.02   |         |         | $       | 1.13   |         |         | $       | 1.18   |         |         | $       | 1.15   |        
|                    |                                                              |                                       | Diluted |               | $       | 3.05   |         |         | $       | 1.98   |         |         | $       | 1.11   |         |         | $       | 1.16   |         |         | $       | 1.13   |        
|                    | Weighted average shares outstanding:                         |                                       |         |               |         |        |         |         |         |        |         |         |         |        |         |         |         |        |         |         |        
|                    |                                                              |                                       | Basic   |               |         | 23,501 |         |         |         | 22,996 |         |         |         | 22,711 |         |         |         | 22,414 |         |         |         | 22,211 |        
|                    |                                                              |                                       | Diluted |               |         | 24,019 |         |         |         | 23,432 |         |         |         | 23,001 |         |         |         | 22,833 |         |         |         | 22,575 |        
|Other Data:         |                                                              |                                       |         |               |         |        |         |         |         |        |         |         |         |        |         |         |         |        |         |        
|                    | Capital expenditures                                         |                                       | $       | 17,144        |         |        | $       | 12,356  |         |        | $       | 8,558   |         |        | $       | 17,928  |         |        | $       | 29,525  |        
|                    | Depreciation and amortization                                |                                       |         | 13,687        |         |        |         | 12,637  |         |        |         | 11,900  |         |        |         | 10,827  |         |        |         | 9,207   |        
|Balance Sheet Data: |                                                              |                                       |         |               |         |        |         |         |         |        |         |         |         |        |         |         |         |        |         |        
|                    | Working capital                                              |                                       | $       | 260,761       |         |        | $       | 176,222 |         |        | $       | 116,495 |         |        | $       | 90,483  |         |        | $       | 130,728 |        
|                    | Property, net                                                |                                       |         | 105,138       |         |        |         | 102,368 |         |        |         | 105,047 |         |        |         | 107,031 |         |        |         | 100,038 |        
|                    | Total assets                                                 |                                       |         | 450,562       |         |        |         | 343,646 |         |        |         | 267,116 |         |        |         | 278,208 |         |        |         | 292,171 |        
|                    | Long-term debt and capital leases, excluding current portion |                                       |         |              |         |        |         |        |         |        |         |        |         |        |         |        |         |        |         | 60,000  |        
|                    | Other long-term liabilities                                  |                                       |         | 16,771        |         |        |         | 14,100  |         |        |         | 14,464  |         |        |         | 16,370  |         |        |         | 15,575  |        
|                    | Total stockholders equity                                   |                                       |         | 360,835       |         |        |         | 274,783 |         |        |         | 217,010 |         |        |         | 187,137 |         |        |         | 160,185 |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a $1.2 million pre-tax make-whole premium
    attributable to the Companys prepayment of
    $30.0 million on its senior unsecured notes during the
    third quarter of 2002.                                                                                                                                                                                                                                                                                                                                                    
|   
|(2) | Other income for 2005 includes a $2.2 million gain recorded
    from the sale of real estate not used in operations. Other
    expense for 2001 includes $0.6 million in expenses incurred
    in facilitating the offering of common stock by certain of the
    Companys stockholders, pursuant to a registration rights
    agreement.                                                                                                                                                                                                  
|   
|(3) | Net income for 2004 includes a U.S. research and
    experimentation income tax credit of $0.9 million related
    to qualified spending for the two-year period from 2002 through
    2003, and a U.S. income tax benefit (extraterritorial
    income exclusion) of $1.3 million related to export
    shipments for the years 2002 and 2003. Net income for 2003
    includes a U.S. research and experimentation income tax
    credit of $3.7 million related to qualified spending for
    the ten-year period from 1992 through 2001.

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ITEM 7  MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




OVERVIEW












28



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Revenue


percentage-of


Gross Profit




Selling, General and Administration Expenses




Operating Income (Loss)




RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
2005 AND 2004




| |        
| | -------
| | Revenue



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| |             
| | ------------
| | Gross Profit





| |                                             
| | --------------------------------------------
| | Selling, General and Administrative Expenses





| |                 
| | ----------------
| | Operating Income





| |                 
| | ----------------
| | Interest Expense





| |                         
| | ------------------------
| | Other Income and Expense





| |                           
| | --------------------------
| | Provision for Income Taxes



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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
2004 AND 2003




| |        
| | -------
| | Revenue





| |             
| | ------------
| | Gross Profit





| |                                             
| | --------------------------------------------
| | Selling, General and Administrative Expenses





| |                 
| | ----------------
| | Operating Income





| |                 
| | ----------------
| | Interest Expense





| |                           
| | --------------------------
| | Provision for Income Taxes



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LIQUIDITY AND CAPITAL RESOURCES










| |                     
| | --------------------
| | Operating Activities







| |                     
| | --------------------
| | Investing Activities





| |                     
| | --------------------
| | Financing Activities



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| |                  
| | -----------------
| | Credit Facilities







| |                             
| | ----------------------------
| | Contractual Cash Obligations



|                               |  |                        |       |  |      |   |      |           |  |   |           |  |  |            |     |  |  |   |      | 
|------------------------------ |  | ---------------------- | ----- |  | ---- | - | ---- | --------- |  | - | --------- |  |  | ---------- | --- |  |  | - | ---- | 
|                               |  | Payments Due by Period |      
|                               |  |                        |      
|                               |  | Total                  |       |  | 2006 |   |      | 2007-2008 |  |   | 2009-2010 |  |  | Thereafter |    
|                               |  |                        |       |  |      |   |      |           |  |   |           |  |  |            |    
|                               |  | (In millions)          |      
|Operating leases(1)            |  | $                      | 3.6   |  |      | $ | 1.7  |           |  | $ | 1.8       |  |  | $          | 0.1 |  |  | $ |     | 
|Purchase Obligations(2)        |  |                        | 80.3  |  |      |   | 74.4 |           |  |   | 5.4       |  |  |            | 0.5 |  |  |   |     | 
|Other long-term liabilities(3) |  |                        | 17.6  |  |      |   | 0.6  |           |  |   | 1.1       |  |  |            | 1.2 |  |  |   | 14.7 | 
|                               |  |                        |       |  |      |   |      |           |  |   |           |  |  |            |    
|Total                          |  | $                      | 101.5 |  |      | $ | 76.7 |           |  | $ | 8.3       |  |  | $          | 1.8 |  |  | $ | 14.7 | 
|                               |  |                        |       |  |      |   |      |           |  |   |           |  |  |            |    






|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents obligations for minimum payments under noncancelable
    operating leases. The Companys lease commitments are
    primarily for operating facilities, vehicles and equipment.              
|   
|(2) | Represents obligations under outstanding purchase orders and
    other commitments and estimated future cash payments pursuant to
    contractual obligations related to investments in joint ventures.
|   
|(3) | Represents estimated future cash payments for post-retirement
    health and life benefits, pension plan benefits and deferred
    compensation.                                                       



| |                   
| | ------------------
| | Other Indebtedness





| |                     
| | --------------------
| | Capital Expenditures





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| |          
| | ---------
| | Dividends



BACKLOG




percentage-of percentage-of


CRITICAL ACCOUNTING ESTIMATES






| |                    
| | -------------------
| | Revenue Recognition





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percentage-of






| |            
| | -----------
| | Inventories

first-in,








| |                   
| | ------------------
| | Product Warranties



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| |             
| | ------------
| | Pension Plan





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|                                                     |  |                 |      |              |  |   |      |  
|---------------------------------------------------- |  | --------------- | ---- | ------------ |  | - | ---- | -
|                                                     |  | Impact on 2005  |      | Impact on   
|                                                     |  | Pre-tax Pension |      | December 31,
|                                                     |  | Expense         |      | 2005 PBO    
|                                                     |  |                 |      |             
|                                                     |  | (In millions)  
|Change in Assumption:                                |  |                 |      |              |  |   |      |  
|50 basis point decrease in discount rate             |  | $               | 0.2  |              |  | $ | 2.6  |  
|50 basis point increase in discount rate             |  |                 | *    |              |  |   | (2.4 | )
|50 basis point decrease in expected return on assets |  |                 | 0.2  |              |  |   | n/a  |  
|50 basis point increase in expected return on assets |  |                 | (0.2 | )            |  |   | n/a  |  






|  |                       
|- | ----------------------
|* | Amount was negligible.



| |                                         
| | ----------------------------------------
| | Post Retirement Health and Life Benefits







|                                                     |  |                |     |              |  |   |      |  
|---------------------------------------------------- |  | -------------- | --- | ------------ |  | - | ---- | -
|                                                     |  |                |     | Impact on   
|                                                     |  | Impact on 2005 |     | December 31,
|                                                     |  | Service and    |     | 2005 Benefit
|                                                     |  | Interest       |     | Obligation  
|                                                     |  |                |     |             
|                                                     |  | (In millions) 
|Change in Assumption:                                |  |                |     |              |  |   |      |  
|50 basis point decrease in discount rate             |  |                | *   |              |  | $ | 0.2  |  
|50 basis point increase in discount rate             |  |                | *   |              |  |   | (0.2 | )
|50 basis point decrease in expected return on assets |  |                | n/a |              |  |   | n/a  |  
|50 basis point increase in expected return on assets |  |                | n/a |              |  |   | n/a  |  






|  |                       
|- | ----------------------
|* | Amount was negligible.

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| |            
| | -----------
| | Tax Matters









RECENT ACCOUNTING PRONOUNCEMENTS






39



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106-2, 106-2). 106-2 106-2 106-2






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ITEM 7A  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK


Foreign currency exchange rate risk






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ITEM 8  FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA


HYDRIL


INDEX TO FINANCIAL STATEMENTS AND REPORTS


|                                                                                                                                                 |                                                                                                                                            |      |    |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------ | ---- | -- | -- | 
|                                                                                                                                                 |                                                                                                                                            | Page |   
|                                                                                                                                                 |                                                                                                                                            |      |   
|                                                                                                                                                 |                                                                                                                                            |     
|MANAGEMENTS REPORT ON INTERNAL
    CONTROL OVER FINANCIAL REPORTING                                                                             |                                                                                                                                            |      | 43 |   
|REPORT OF INDEPENDENT REGISTERED PUBLIC
    ACCOUNTING FIRM (REGARDING MANAGEMENTS ASSESSMENT OF
    INTERNAL CONTROL OVER FINANCIAL REPORTING) |                                                                                                                                            |      | 44 |   
|REPORT OF INDEPENDENT REGISTERED PUBLIC
    ACCOUNTING FIRM (REGARDING AUDIT OF FINANCIAL STATEMENTS)                                            |                                                                                                                                            |      | 46 |   
|FINANCIAL STATEMENTS:                                                                                                                            |                                                                                                                                            |      |    |   
|                                                                                                                                                 | Consolidated Balance Sheets 
    December 31, 2005 and 2004                                                                               |      |    | 47 | 
|                                                                                                                                                 | Consolidated Statements of
    Operations  Years Ended December 31, 2005, 2004
    and 2003                                               |      |    | 49 | 
|                                                                                                                                                 | Consolidated Statements of Changes in
    Stockholders Equity and Comprehensive Income 
    Years Ended December 31, 2005, 2004 and 2003 |      |    | 50 | 
|                                                                                                                                                 | Consolidated Statements of Cash
    Flows  Years Ended December 31, 2005, 2004 and
    2003                                               |      |    | 51 | 
|NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS                                                                                                   |                                                                                                                                            |      | 52 |   

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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING














43



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















44



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45



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






















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HYDRIL COMPANY





CONSOLIDATED BALANCE SHEETS


(In thousands, except share and per share information)


|                        |                                                |                                                                           |                      |          |        |         |   |          |        |         | 
|----------------------- | ---------------------------------------------- | ------------------------------------------------------------------------- | -------------------- | -------- | ------ | ------- | - | -------- | ------ | ------- | 
|                        |                                                | December 31,                                                              |                     
|                        |                                                |                                                                           |                     
|                        |                                                | 2005                                                                      |                      |          | 2004   |        
|                        |                                                |                                                                           |                      |          |        |        
|CURRENT ASSETS:         |                                                |                                                                           |                      |          |        |         |   |         
|                        | Cash and cash equivalents                      |                                                                           | $                    | 65,145   |        |         | $ | 51,733   |       
|                        | Investments and marketable securities          |                                                                           |                      | 108,084  |        |         |   | 69,365   |       
|                        | Receivables:                                   |                                                                           |                      |          |        |         |   |          |       
|                        |                                                | Trade, less allowance for doubtful accounts: 2005, $759; 2004,
    $1,214 |                      |          | 67,523 |         |   |          | 56,053 |        
|                        |                                                | Contract costs and estimated earnings in excess of billings               |                      |          | 8,803  |         |   |          | 4,860  |        
|                        |                                                | Other                                                                     |                      |          | 1,878  |         |   |          | 1,528  |        
|                        |                                                |                                                                           |                      |          |        |        
|                        |                                                |                                                                           | Total receivables    |          |        | 78,204  |   |          |        | 62,441  | 
|                        |                                                |                                                                           |                      |          |        |        
|                        | Inventories:                                   |                                                                           |                      |          |        |         |   |          |       
|                        |                                                | Finished goods                                                            |                      |          | 28,917 |         |   |          | 21,179 |        
|                        |                                                | Work-in-process                                                           |                      |          | 18,828 |         |   |          | 8,854  |        
|                        |                                                | Raw materials                                                             |                      |          | 9,901  |         |   |          | 4,787  |        
|                        |                                                |                                                                           |                      |          |        |        
|                        |                                                |                                                                           | Total inventories    |          |        | 57,646  |   |          |        | 34,820  | 
|                        |                                                |                                                                           |                      |          |        |        
|                        | Deferred tax asset                             |                                                                           |                      | 11,390   |        |         |   | 8,794    |       
|                        | Other current assets                           |                                                                           |                      | 3,669    |        |         |   | 3,422    |       
|                        |                                                |                                                                           |                      |          |        |        
|                        |                                                |                                                                           | Total current assets |          |        | 324,138 |   |          |        | 230,575 | 
|                        |                                                |                                                                           |                      |          |        |        
|PROPERTY:               |                                                |                                                                           |                      |          |        |         |   |         
|                        | Land and improvements                          |                                                                           |                      | 21,846   |        |         |   | 21,314   |       
|                        | Buildings and improvements                     |                                                                           |                      | 52,620   |        |         |   | 54,718   |       
|                        | Machinery and equipment                        |                                                                           |                      | 178,145  |        |         |   | 162,785  |       
|                        | Construction-in-progress                       |                                                                           |                      | 5,004    |        |         |   | 5,710    |       
|                        |                                                |                                                                           |                      |          |        |        
|                        |                                                |                                                                           | Total                |          |        | 257,615 |   |          |        | 244,527 | 
|                        | Less accumulated depreciation and amortization |                                                                           |                      | (152,477 | )      |         |   | (142,159 | )     
|                        |                                                |                                                                           |                      |          |        |        
|                        |                                                |                                                                           | Property, net        |          |        | 105,138 |   |          |        | 102,368 | 
|                        |                                                |                                                                           |                      |          |        |        
|OTHER LONG-TERM ASSETS: |                                                |                                                                           |                      |          |        |         |   |         
|                        | Investments                                    |                                                                           |                      | 8,387    |        |         |   | 3,501    |       
|                        | Deferred tax asset                             |                                                                           |                      | 212      |        |         |   | 588      |       
|                        | Other assets                                   |                                                                           |                      | 12,687   |        |         |   | 6,614    |       
|                        |                                                |                                                                           |                      |          |        |        
|                        |                                                |                                                                           | TOTAL                |          | $      | 450,562 |   |          | $      | 343,646 | 
|                        |                                                |                                                                           |                      |          |        |        



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HYDRIL COMPANY





CONSOLIDATED BALANCE SHEETS


(In thousands, except share and per share information)


|                                        |                                                             |                                                                                                                                                                                                     |                             |         |        |         |   |         |       |         | 
|--------------------------------------- | ----------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | ------ | ------- | - | ------- | ----- | ------- | 
|                                        |                                                             | December 31,                                                                                                                                                                                        |                            
|                                        |                                                             |                                                                                                                                                                                                     |                            
|                                        |                                                             | 2005                                                                                                                                                                                                |                             |         | 2004   |        
|                                        |                                                             |                                                                                                                                                                                                     |                             |         |        |        
|CURRENT LIABILITIES:                    |                                                             |                                                                                                                                                                                                     |                             |         |        |         |   |        
|                                        | Accounts payable                                            |                                                                                                                                                                                                     | $                           | 23,443  |        |         | $ | 23,292  |      
|                                        | Billings in excess of contract costs and estimated earnings |                                                                                                                                                                                                     |                             | 4,482   |        |         |   | 342     |      
|                                        | Accrued liabilities                                         |                                                                                                                                                                                                     |                             | 26,791  |        |         |   | 24,817  |      
|                                        | Income taxes payable                                        |                                                                                                                                                                                                     |                             | 8,661   |        |         |   | 5,902   |      
|                                        |                                                             |                                                                                                                                                                                                     |                             |         |        |        
|                                        |                                                             |                                                                                                                                                                                                     | Total current liabilities   |         |        | 63,377  |   |         |       | 54,353  | 
|                                        |                                                             |                                                                                                                                                                                                     |                             |         |        |        
|LONG-TERM LIABILITIES:                  |                                                             |                                                                                                                                                                                                     |                             |         |        |         |   |        
|                                        | Deferred tax liability                                      |                                                                                                                                                                                                     |                             | 9,579   |        |         |   | 410     |      
|                                        | Other                                                       |                                                                                                                                                                                                     |                             | 16,771  |        |         |   | 14,100  |      
|                                        |                                                             |                                                                                                                                                                                                     |                             |         |        |        
|                                        |                                                             |                                                                                                                                                                                                     | Total long-term liabilities |         |        | 26,350  |   |         |       | 14,510  | 
|                                        |                                                             |                                                                                                                                                                                                     |                             |         |        |        
|COMMITMENTS AND CONTINGENCIES (Note 11) |                                                             |                                                                                                                                                                                                     |                             |         |        |         |   |        
|STOCKHOLDERS EQUITY:                   |                                                             |                                                                                                                                                                                                     |                             |         |        |         |   |        
|                                        | Capital stock:                                              |                                                                                                                                                                                                     |                             |         |        |         |   |         |      
|                                        |                                                             | Preferred stock  authorized, 10,000,000 shares
    of $1 par value; none issued or outstanding                                                                                                     |                             |         |       |         |   |         |      |        
|                                        |                                                             | Common stock  authorized 75,000,000 shares of
    $.50 par value; 20,182,531 and 18,651,458 shares
    issued and outstanding at December 31, 2005 and 2004,
    respectively                      |                             |         | 10,091 |         |   |         | 9,326 |        
|                                        |                                                             | Class B common stock  authorized,
    32,000,000 shares of $.50 par value; 3,479,920 and
    4,620,130 shares issued and outstanding
    at           December 31,
    2005 and 2004, respectively |                             |         | 1,740  |         |   |         | 2,310 |        
|                                        | Additional paid in capital                                  |                                                                                                                                                                                                     |                             | 79,356  |        |         |   | 61,810  |      
|                                        | Retained earnings                                           |                                                                                                                                                                                                     |                             | 279,789 |        |         |   | 206,546 |      
|                                        | Deferred compensation                                       |                                                                                                                                                                                                     |                             | (6,980  | )      |         |   | (3,325  | )    
|                                        | Accumulated other comprehensive loss                        |                                                                                                                                                                                                     |                             | (3,161  | )      |         |   | (1,884  | )    
|                                        |                                                             |                                                                                                                                                                                                     |                             |         |        |        
|                                        |                                                             |                                                                                                                                                                                                     | Total stockholders equity  |         |        | 360,835 |   |         |       | 274,783 | 
|                                        |                                                             |                                                                                                                                                                                                     |                             |         |        |        
|                                        |                                                             |                                                                                                                                                                                                     | TOTAL                       |         | $      | 450,562 |   |         | $     | 343,646 | 
|                                        |                                                             |                                                                                                                                                                                                     |                             |         |        |        



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HYDRIL COMPANY





CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except share and per share amounts)


|                                            |                            |                         |         |            |        |   |         |            |        |   |         |            |        | 
|------------------------------------------- | -------------------------- | ----------------------- | ------- | ---------- | ------ | - | ------- | ---------- | ------ | - | ------- | ---------- | ------ | 
|                                            |                            | Year Ended December 31, |        
|                                            |                            |                         |        
|                                            |                            | 2005                    |         |            | 2004   |   |         | 2003       |       
|                                            |                            |                         |         |            |        |   |         |            |       
|REVENUE                                     |                            | $                       | 376,724 |            |        | $ | 285,353 |            |        | $ | 212,017 |           
|COST OF SALES                               |                            |                         | 213,161 |            |        |   | 166,940 |            |        |   | 130,124 |           
|                                            |                            |                         |         |            |        |   |         |            |       
|GROSS PROFIT                                |                            |                         | 163,563 |            |        |   | 118,413 |            |        |   | 81,893  |           
|                                            |                            |                         |         |            |        |   |         |            |       
|SELLING, GENERAL & ADMINISTRATION EXPENSES: |                            |                         |         |            |        |   |         |            |        |   |         |           
|                                            | Engineering                |                         |         | 12,075     |        |   |         | 11,618     |        |   |         | 13,455     |       
|                                            | Sales and marketing        |                         |         | 21,516     |        |   |         | 18,473     |        |   |         | 16,287     |       
|                                            | General and administration |                         |         | 25,016     |        |   |         | 21,916     |        |   |         | 17,988     |       
|                                            |                            |                         |         |            |        |   |         |            |       
|                                            |                            | Total                   |         |            | 58,607 |   |         |            | 52,007 |   |         |            | 47,730 | 
|                                            |                            |                         |         |            |        |   |         |            |       
|OPERATING INCOME                            |                            |                         | 104,956 |            |        |   | 66,406  |            |        |   | 34,163  |           
|INTEREST EXPENSE                            |                            |                         |        |            |        |   |        |            |        |   | (1,101  | )         
|INTEREST INCOME                             |                            |                         | 3,900   |            |        |   | 1,113   |            |        |   | 724     |           
|OTHER INCOME (EXPENSE), NET                 |                            |                         | 724     |            |        |   | (335    | )          |        |   | (135    | )         
|                                            |                            |                         |         |            |        |   |         |            |       
|INCOME BEFORE INCOME TAXES                  |                            |                         | 109,580 |            |        |   | 67,184  |            |        |   | 33,651  |           
|PROVISION FOR INCOME TAXES                  |                            |                         | 36,337  |            |        |   | 20,697  |            |        |   | 8,073   |           
|                                            |                            |                         |         |            |        |   |         |            |       
|NET INCOME                                  |                            | $                       | 73,243  |            |        | $ | 46,487  |            |        | $ | 25,578  |           
|                                            |                            |                         |         |            |        |   |         |            |       
|EARNINGS PER SHARE:                         |                            |                         |         |            |        |   |         |            |        |   |         |           
|                                            | BASIC                      |                         | $       | 3.12       |        |   | $       | 2.02       |        |   | $       | 1.13       |       
|                                            | DILUTED                    |                         | $       | 3.05       |        |   | $       | 1.98       |        |   | $       | 1.11       |       
|WEIGHTED AVERAGE SHARES OUTSTANDING:        |                            |                         |         |            |        |   |         |            |        |   |         |           
|                                            | BASIC                      |                         |         | 23,500,620 |        |   |         | 22,996,401 |        |   |         | 22,710,838 |       
|                                            | DILUTED                    |                         |         | 24,019,273 |        |   |         | 23,432,493 |        |   |         | 23,000,621 |       



49



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HYDRIL COMPANY





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY


AND COMPREHENSIVE INCOME


For the Years Ended December 31, 2003, 2004 and 2005


(In thousands, except share amounts)


|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |        |   |   |   |        |   |        |        |         |        |        |        | 
|---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------ | --------------------------------- | -------------- | ------ | - | ------ | ---------- |  | - | ---------- | - | ----------- | -------- | ------ | - | ------------- | - | ------ | ------------ |  | - | ------- | ------ |  | ------ | ------ | - | - | - | ------ | - | ------ | ------ | ------- | ------ | ------ | ------ | 
|                                                                                                                                   |                                      |                                      |                                   | Class B Common |        |   |        |            |  |   |            |   | Accumulated |          |        |  
|                                                                                                                                   |                                      | Common Stock                         |                                   |                | Stock  |   |        | Additional |  |   |            |   |             |          | Other  |   |               |  
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        | Paid In    |  |   | Retained   |   |             | Deferred |        |   | Comprehensive |   |        |             
|                                                                                                                                   |                                      | Shares                               |                                   |                | Amount |   |        | Shares     |  |   | Amount     |   |             | Capital  |        |   | Earnings      |   |        | Compensation |  |   | Loss    |        |  | Total  |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|Balance, December 31, 2002                                                                                                         |                                      |                                      | 15,369,638                        |                |        | $ | 7,685  |            |  |   | 7,192,427  |   |             | $        | 3,596  |   |               | $ | 43,898 |              |  | $ | 134,481 |        |  | $      |       |   |   | $ | (2,523 | ) |        | $      | 187,137 |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|                                                                                                                                   | Net Income                           |                                      |                                   |               |        |   | $      |           |  |   |            |  |             |          | $      |  |               |   | $      |             |  |   | $       | 25,578 |  |        | $      |  |   |   | $      |  |        |        | $       | 25,578 |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|                                                                                                                                   | Other Comprehensive Loss, net of tax |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |        |   |   |   |        |   |        |        |         |        |       
|                                                                                                                                   |                                      | Minimum pension liability adjustment |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |        |   |  |   |        |   | 555    |        |         |        | 555    |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|                                                                                                                                   |                                      |                                      | Total Comprehensive Income (Loss) |                |        |  |        |            |  |  |            |   |             |         |        |   |               |  |        |              |  |  |         |        |  | 25,578 |        |   |   |   |        |   |        | 555    |         |        |        | 26,133 | 
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|Issuance of Common stock-employee stock purchase plan and
    exercise of stock options                                            |                                      |                                      | 239,448                           |                |        |   | 119    |            |  |   |           |   |             |          |       |   |               |   | 2,011  |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        | 2,130   |       
|Tax benefit on option exercises                                                                                                    |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   | 1,295  |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        | 1,295   |       
|Issuance of Class B Common stock-exercise of stock options                                                                         |                                      |                                      |                                  |                |        |   |       |            |  |   | 15,000     |   |             |          | 8      |   |               |   | 64     |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        | 72      |       
|Conversion of Class B Common stock to Common stock                                                                                 |                                      |                                      | 449,706                           |                |        |   | 225    |            |  |   | (449,706   | ) |             |          | (225   | ) |               |   |       |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        |        |       
|Awards of Restricted units/stock                                                                                                   |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   | 2,066  |              |  |   |        |        |  |        | (2,066 | ) |   |   |       |   |        |        |        |       
|Amortization of deferred compensation                                                                                              |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   |       |              |  |   |        |        |  |        | 243    |   |   |   |       |   |        |        | 243     |       
|Forfeitures of restricted units                                                                                                    |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   | (22    | )            |  |   |        |        |  |        | 22     |   |   |   |       |   |        |        |        |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|Balance, December 31, 2003                                                                                                         |                                      |                                      | 16,058,792                        |                |        | $ | 8,029  |            |  |   | 6,757,721  |   |             | $        | 3,379  |   |               | $ | 49,312 |              |  | $ | 160,059 |        |  | $      | (1,801 | ) |   | $ | (1,968 | ) |        | $      | 217,010 |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|                                                                                                                                   | Net Income                           |                                      |                                   |               |        |   | $      |           |  |   |            |  |             |          | $      |  |               |   | $      |             |  |   | $       | 46,487 |  |        | $      |  |   |   | $      |  |        |        | $       | 46,487 |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|                                                                                                                                   | Other Comprehensive Loss, net of tax |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |        |   |   |   |        |   |        |        |         |        |       
|                                                                                                                                   |                                      | Minimum pension liability adjustment |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |        |   |  |   |        |   | 84     |        |         |        | 84     |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|                                                                                                                                   |                                      |                                      | Total Comprehensive Income (Loss) |                |        |  |        |            |  |  |            |   |             |         |        |   |               |  |        |              |  |  |         |        |  | 46,487 |        |   |   |  |        |   |        | 84     |         |        |        | 46,571 | 
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|Issuance of Common stock-employee stock purchase plan, exercise
    of stock options, restricted stock and vested restricted units |                                      |                                      | 446,218                           |                |        |   | 224    |            |  |   |           |   |             |          |       |   |               |   | 7,546  |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        | 7,770   |       
|Tax benefit on option exercises                                                                                                    |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   | 2,773  |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        | 2,773   |       
|Issuance of Class B Common stock-exercise of stock options                                                                         |                                      |                                      |                                  |                |        |   |       |            |  |   | 8,857      |   |             |          | 4      |   |               |   | 37     |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        | 41      |       
|Conversion of Class B Common stock to Common stock                                                                                 |                                      |                                      | 2,146,448                         |                |        |   | 1,073  |            |  |   | (2,146,448 | ) |             |          | (1,073 | ) |               |   |       |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        |        |       
|Awards of Restricted units/stock                                                                                                   |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   | 2,374  |              |  |   |        |        |  |        | (2,374 | ) |   |   |       |   |        |        |        |       
|Amortization of deferred compensation                                                                                              |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   |       |              |  |   |        |        |  |        | 618    |   |   |   |       |   |        |        | 618     |       
|Forfeitures of restricted units                                                                                                    |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   | (232   | )            |  |   |        |        |  |        | 232    |   |   |   |       |   |        |        |        |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|Balance, December 31, 2004                                                                                                         |                                      |                                      | 18,651,458                        |                |        | $ | 9,326  |            |  |   | 4,620,130  |   |             | $        | 2,310  |   |               | $ | 61,810 |              |  | $ | 206,546 |        |  | $      | (3,325 | ) |   | $ | (1,884 | ) |        | $      | 274,783 |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|                                                                                                                                   | Net Income                           |                                      |                                   |               |        |   | $      |           |  |   |            |  |             |          | $      |  |               |   | $      |             |  |   | $       | 73,243 |  |        | $      |  |   |   | $      |  |        |        | $       | 73,243 |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|                                                                                                                                   | Other Comprehensive Loss, net of tax |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |        |   |   |   |        |   |        |        |         |        |       
|                                                                                                                                   |                                      | Minimum pension liability adjustment |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |        |   |  |   |        |   | (1,277 | )      |         |        | (1,277 | )     
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|                                                                                                                                   |                                      |                                      | Total Comprehensive Income (Loss) |                |        |  |        |            |  |  |            |   |             |         |        |   |               |  |        |              |  |  |         |        |  | 73,243 |        |   |   |  |        |   |        | (1,277 | )       |        |        | 71,966 | 
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|Issuance of Common stock-employee stock purchase plan, exercise
    of stock options, restricted stock and vested restricted units |                                      |                                      | 390,863                           |                |        |   | 195    |            |  |   |           |   |             |          |       |   |               |   | 7,591  |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        | 7,786   |       
|Tax benefit on option exercises                                                                                                    |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   | 4,667  |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        | 4,667   |       
|Conversion of Class B Common stock to Common stock                                                                                 |                                      |                                      | 1,140,210                         |                |        |   | 570    |            |  |   | (1,140,210 | ) |             |          | (570   | ) |               |   |       |              |  |   |        |        |  |        |       |   |   |   |       |   |        |        |        |       
|Awards of Restricted units/stock                                                                                                   |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   | 5,433  |              |  |   |        |        |  |        | (5,433 | ) |   |   |       |   |        |        |        |       
|Amortization of deferred compensation                                                                                              |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   |       |              |  |   |        |        |  |        | 1,633  |   |   |   |       |   |        |        | 1,633   |       
|Forfeitures of restricted units                                                                                                    |                                      |                                      |                                  |                |        |   |       |            |  |   |           |   |             |          |       |   |               |   | (145   | )            |  |   |        |        |  |        | 145    |   |   |   |       |   |        |        |        |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       
|Balance, December 31, 2005                                                                                                         |                                      |                                      | 20,182,531                        |                |        | $ | 10,091 |            |  |   | 3,479,920  |   |             | $        | 1,740  |   |               | $ | 79,356 |              |  | $ | 279,789 |        |  | $      | (6,980 | ) |   | $ | (3,161 | ) |        | $      | 360,835 |       
|                                                                                                                                   |                                      |                                      |                                   |                |        |   |        |            |  |   |            |   |             |          |        |   |               |   |        |              |  |   |         |        |  |        |       



50



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##### Table of Contents



HYDRIL COMPANY





CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)


|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |        |         |         |         |        |        |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------------------------- | --------------------------------------------------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------ | ------- | -
|                                                     |                                                                                       | Year Ended December 31,                                     |                                                            
|                                                     |                                                                                       |                                                             |                                                            
|                                                     |                                                                                       | 2005                                                        |                                                             |                                                     | 2004   |         |         | 2003    |       
|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |        |         |         |        
|                                                     | Net income                                                                            |                                                             | $                                                           | 73,243                                              |        |         | $       | 46,487  |        |         | $       | 25,578  |       
|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |       
|                                                     | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                             |                                                             |                                                     |        |         |         |         |        |         |         |         |       
|                                                     |                                                                                       | Amortization of deferred compensation                       |                                                             |                                                     | 1,633  |         |         |         | 618    |         |         |         | 243    |       
|                                                     |                                                                                       | Depreciation and amortization                               |                                                             |                                                     | 13,687 |         |         |         | 12,637 |         |         |         | 11,900 |       
|                                                     |                                                                                       | Deferred income taxes                                       |                                                             |                                                     | 7,552  |         |         |         | 3,127  |         |         |         | (1,539 | )     
|                                                     |                                                                                       | Provision for doubtful accounts                             |                                                             |                                                     | 33     |         |         |         | 81     |         |         |         | 236    |       
|                                                     |                                                                                       | Gain on sale of real estate holdings not used in operations |                                                             |                                                     | (2,199 | )       |         |         |       |         |         |         | (104   | )     
|                                                     |                                                                                       | Change in operating assets and liabilities:                 |                                                             |                                                     |        |         |         |         |        |         |         |         |        |       
|                                                     |                                                                                       |                                                             | Receivables                                                 |                                                     |        | (11,853 | )       |         |        | (20,934 | )       |         |        | (1,175 | )      
|                                                     |                                                                                       |                                                             | Contract costs and estimated earnings in excess of billings |                                                     |        | (3,943  | )       |         |        | (494    | )       |         |        | 463    |        
|                                                     |                                                                                       |                                                             | Inventories                                                 |                                                     |        | (22,826 | )       |         |        | 1,596   |         |         |        | 5,068  |        
|                                                     |                                                                                       |                                                             | Other current and noncurrent assets                         |                                                     |        | 4,091   |         |         |        | 6,276   |         |         |        | 95     |        
|                                                     |                                                                                       |                                                             | Accounts payable                                            |                                                     |        | 151     |         |         |        | 9,811   |         |         |        | (242   | )      
|                                                     |                                                                                       |                                                             | Billings in excess of contract costs and estimated earnings |                                                     |        | 4,140   |         |         |        | (145    | )       |         |        | (4,494 | )      
|                                                     |                                                                                       |                                                             | Accrued liabilities                                         |                                                     |        | 1,974   |         |         |        | 7,717   |         |         |        | (3,917 | )      
|                                                     |                                                                                       |                                                             | Income taxes payable                                        |                                                     |        | 2,759   |         |         |        | 1,552   |         |         |        | 587    |        
|                                                     |                                                                                       |                                                             | Other long-term liabilities                                 |                                                     |        | 1,394   |         |         |        | (364    | )       |         |        | (4,470 | )      
|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |       
|                                                     |                                                                                       |                                                             |                                                             | Net cash provided by operating activities           |        |         | 69,836  |         |        |         | 67,965  |         |        |        | 28,229  |  
|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |       
|NET CASH FROM INVESTING ACTIVITIES:                  |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |        |         |         |        
|                                                     | Purchase of held-to-maturity investments                                              |                                                             |                                                             | (20,787                                             | )      |         |         | (29,508 | )      |         |         | (18,931 | )     
|                                                     | Proceeds from held-to-maturity investments                                            |                                                             |                                                             | 27,043                                              |        |         |         | 15,095  |        |         |         | 20,705  |       
|                                                     | Purchase of available for sale investments                                            |                                                             |                                                             | (110,535                                            | )      |         |         | (47,495 | )      |         |         | (7,925  | )     
|                                                     | Proceeds from available for sale investments                                          |                                                             |                                                             | 60,674                                              |        |         |         | 2,755   |        |         |         | 2,000   |       
|                                                     | Capital expenditures                                                                  |                                                             |                                                             | (17,144                                             | )      |         |         | (12,356 | )      |         |         | (8,558  | )     
|                                                     | Proceeds from the sale of real estate not used in operations                          |                                                             |                                                             | 2,935                                               |        |         |         |        |        |         |         | 149     |       
|                                                     | Purchase of a product line                                                            |                                                             |                                                             | (3,640                                              | )      |         |         |        |        |         |         |        |       
|                                                     | Other, net                                                                            |                                                             |                                                             | (2,756                                              | )      |         |         | (750    | )      |         |         | (1,246  | )     
|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |       
|                                                     |                                                                                       |                                                             |                                                             | Net cash used in investing activities               |        |         | (64,210 | )       |        |         | (72,259 | )       |        |        | (13,806 | )
|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |       
|NET CASH FROM FINANCING ACTIVITIES:                  |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |        |         |         |        
|                                                     | Repayment of debt                                                                     |                                                             |                                                             |                                                    |        |         |         |        |        |         |         | (30,000 | )     
|                                                     | Net proceeds from issuance of common stock                                            |                                                             |                                                             | 265                                                 |        |         |         | 242     |        |         |         | 230     |       
|                                                     | Net proceeds from exercise of stock options                                           |                                                             |                                                             | 7,521                                               |        |         |         | 7,571   |        |         |         | 1,971   |       
|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |       
|                                                     |                                                                                       |                                                             |                                                             | Net cash provided by (used in) financing activities |        |         | 7,786   |         |        |         | 7,813   |         |        |        | (27,799 | )
|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                       |                                                             | 13,412                                                      |                                                     |        |         | 3,519   |         |        |         | (13,376 | )      
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     |                                                                                       |                                                             | 51,733                                                      |                                                     |        |         | 48,214  |         |        |         | 61,590  |        
|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |       
|CASH AND CASH EQUIVALENTS AT END OF PERIOD           |                                                                                       | $                                                           | 65,145                                                      |                                                     |        | $       | 51,733  |         |        | $       | 48,214  |        
|                                                     |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |       
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:    |                                                                                       |                                                             |                                                             |                                                     |        |         |         |         |        |         |         |        
|                                                     | Interest paid                                                                         |                                                             | $                                                           |                                                    |        |         | $       |        |        |         | $       | 1,044   |       
|                                                     | Income taxes paid:                                                                    |                                                             |                                                             |                                                     |        |         |         |         |        |         |         |         |       
|                                                     |                                                                                       | Domestic                                                    |                                                             |                                                     | 4,406  |         |         |         | 2,530  |         |         |         |       |       
|                                                     |                                                                                       | Foreign                                                     |                                                             |                                                     | 15,981 |         |         |         | 8,678  |         |         |         | 7,685  |       



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HYDRIL COMPANY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                           
|-- | ------------------------------------------
|1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations


Principles of Consolidation


Use of Estimates


Revenue Recognition


percentage-of


Cash and Cash Equivalents


Investments




held-to


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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Allowance for Doubtful Accounts


|                             |  |                |       |   |      |   |       |      |  |   |       |  
|---------------------------- |  | -------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                             |  | 2005           |       |   | 2004 |   |       | 2003 | 
|                             |  |                |       |   |      |   |       |      | 
|                             |  | (In thousands) |      
|Beginning balance            |  | $              | 1,214 |   |      | $ | 1,127 |      |  | $ | 1,039 |  
|Additions charged to expense |  |                | 33    |   |      |   | 81    |      |  |   | 141   |  
|Accounts written off         |  |                | (24   | ) |      |   | (37   | )    |  |   | (45   | )
|Other adjustments            |  |                | (464  | ) |      |   | 43    |      |  |   | (8    | )
|                             |  |                |       |   |      |   |       |      | 
|Ending balance               |  | $              | 759   |   |      | $ | 1,214 |      |  | $ | 1,127 |  
|                             |  |                |       |   |      |   |       |      | 



Inventories first-in,




|                                            |  |                |        |   |      |   |        |      |  |   |        |  
|------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                            |  | 2005           |        |   | 2004 |   |        | 2003 | 
|                                            |  |                |        |   |      |   |        |      | 
|                                            |  | (In thousands) |       
|Beginning balance                           |  | $              | 9,810  |   |      | $ | 11,103 |      |  | $ | 7,727  |  
|Provision for excess and obsolete inventory |  |                | 620    |   |      |   | 2,753  |      |  |   | 4,022  |  
|Inventory disposed of during the year       |  |                | (1,092 | ) |      |   | (4,046 | )    |  |   | (646   | )
|                                            |  |                |        |   |      |   |        |      | 
|Ending balance                              |  | $              | 9,338  |   |      | $ | 9,810  |      |  | $ | 11,103 |  
|                                            |  |                |        |   |      |   |        |      | 

Property


|                           |  |              
|-------------------------- |  | -------------
|Buildings and improvements |  | 15 - 45 years
|Machinery and equipment    |  | 3 - 12 years 





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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Impairment of Long-Lived Assets




Product warranties


Research and Development Costs


Stock-Based Compensation




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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                                        |  |                                       |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                        |  | Year Ended December 31,               |       
|                                                                                                                                        |  |                                       |       
|                                                                                                                                        |  | 2005                                  |        |   | 2004 |   |        | 2003 | 
|                                                                                                                                        |  |                                       |        |   |      |   |        |      | 
|                                                                                                                                        |  | (In thousands, except per share data) |       
|Net income, as reported                                                                                                                 |  | $                                     | 73,243 |   |      | $ | 46,487 |      |  | $ | 25,578 |  
|Add: Total stock-based employee compensation for restricted
    stock awards included in reported net income, net of tax                |  |                                       | 1,091  |   |      |   | 407    |      |  |   | 158    |  
|Deduct: Total stock-based employee compensation expense
    determined under the fair value based method for all awards, net
    of tax |  |                                       | (2,778 | ) |      |   | (2,295 | )    |  |   | (1,985 | )
|                                                                                                                                        |  |                                       |        |   |      |   |        |      | 
|Proforma net income                                                                                                                     |  | $                                     | 71,556 |   |      | $ | 44,599 |      |  | $ | 23,751 |  
|                                                                                                                                        |  |                                       |        |   |      |   |        |      | 
|Earnings per share:                                                                                                                     |  |                                       |        |   |      |   |        |      |  |   |        |  
|Basic-as reported                                                                                                                       |  | $                                     | 3.12   |   |      | $ | 2.02   |      |  | $ | 1.13   |  
|Basic-proforma                                                                                                                          |  | $                                     | 3.04   |   |      | $ | 1.94   |      |  | $ | 1.05   |  
|Diluted-as reported                                                                                                                     |  | $                                     | 3.05   |   |      | $ | 1.98   |      |  | $ | 1.11   |  
|Diluted-proforma                                                                                                                        |  | $                                     | 2.98   |   |      | $ | 1.90   |      |  | $ | 1.03   |  



|                                                    |  |       |   |  |      |   |       |      |  |   |       |  
|--------------------------------------------------- |  | ----- | - |  | ---- | - | ----- | ---- |  | - | ----- | -
|                                                    |  | 2005* |   |  | 2004 |   |       | 2003 | 
|                                                    |  |       |   |  |      |   |       |      | 
|Expected life (years)                               |  |       |  |  |      |   | 3.71  |      |  |   | 5.50  |  
|Interest rate                                       |  |       |  |  |      |   | 3.67  | %    |  |   | 2.75  | %
|Volatility                                          |  |       |  |  |      |   | 36.00 | %    |  |   | 49.83 | %
|Dividend yield                                      |  |       |  |  |      |   | 0.00  | %    |  |   | 0.00  | %
|Weighted-average fair value per share at grant date |  |       |  |  |      | $ | 9.34  |      |  | $ | 13.12 |  






|  |                                             
|- | --------------------------------------------
|* | No stock option grants were awarded in 2005.

Environmental Liabilities


Income Taxes




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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Foreign Currencies Translation


Concentration of Credit and Customer Risk


Reclassifications




|   |                                                    
|-- | ---------------------------------------------------
|2. | ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES



|                             |                                          |                |   |       |        |  |   |       |        | 
|---------------------------- | ---------------------------------------- | -------------- | - | ----- | ------ |  | - | ----- | ------ | 
|                             |                                          | December 31,   |  
|                             |                                          |                |  
|                             |                                          | 2005           |   |       | 2004   | 
|                             |                                          |                |   |       |        | 
|                             |                                          | (In thousands) |  
|Accrued liabilities:         |                                          |                |   |       |        |  |   |      
|                             | Accrued payroll, bonus and related       |                | $ | 8,061 |        |  | $ | 7,270 |       
|                             | Taxes (property, sales, payroll, other)  |                |   | 5,145 |        |  |   | 6,145 |       
|                             | Employee benefits                        |                |   | 4,783 |        |  |   | 4,031 |       
|                             | Product warranties                       |                |   | 1,552 |        |  |   | 2,341 |       
|                             | Other                                    |                |   | 7,250 |        |  |   | 5,030 |       
|                             |                                          |                |   |       |        | 
|                             |                                          | Total          |   | $     | 26,791 |  |   | $     | 24,817 | 
|                             |                                          |                |   |       |        | 
|Other long-term liabilities: |                                          |                |   |       |        |  |   |      
|                             | Post retirement health and life benefits |                | $ | 7,245 |        |  | $ | 7,952 |       
|                             | Deferred compensation                    |                |   | 3,869 |        |  |   | 2,745 |       
|                             | Pension plan benefits                    |                |   | 3,093 |        |  |   | 839   |       
|                             | Income tax obligation                    |                |   | 2,564 |        |  |   | 2,564 |       
|                             |                                          |                |   |       |        | 
|                             |                                          | Total          |   | $     | 16,771 |  |   | $     | 14,100 | 
|                             |                                          |                |   |       |        | 

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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                  |  |                |       |   |      |   |       |      |  |   |        |  
|------------------------------------------------- |  | -------------- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                  |  | 2005           |       |   | 2004 |   |       | 2003 | 
|                                                  |  |                |       |   |      |   |       |      | 
|                                                  |  | (In thousands) |      
|Beginning balance                                 |  | $              | 2,341 |   |      | $ | 2,192 |      |  | $ | 3,274  |  
|Claims paid                                       |  |                | (568  | ) |      |   | (530  | )    |  |   | (1,337 | )
|Additional warranty charged (credited) to expense |  |                | (221  | ) |      |   | 679   |      |  |   | 255    |  
|                                                  |  |                |       |   |      |   |       |      | 
|Ending balance                                    |  | $              | 1,552 |   |      | $ | 2,341 |      |  | $ | 2,192  |  
|                                                  |  |                |       |   |      |   |       |      | 



|   |                    
|-- | -------------------
|3. | LONG-TERM CONTRACTS



|                                                                              |       |                |         |       |      |   |         |       | 
|----------------------------------------------------------------------------- | ----- | -------------- | ------- | ----- | ---- | - | ------- | ----- | 
|                                                                              |       | December 31,   |        
|                                                                              |       |                |        
|                                                                              |       | 2005           |         |       | 2004 |  
|                                                                              |       |                |         |       |      |  
|                                                                              |       | (In thousands) |        
|Costs and estimated earnings on uncompleted contracts                         |       | $              | 19,321  |       |      | $ | 23,860  |      
|Less: billings to date                                                        |       |                | (15,000 | )     |      |   | (19,342 | )    
|                                                                              |       |                |         |       |      |  
|Excess of billings over costs and estimated earnings                          |       | $              | 4,321   |       |      | $ | 4,518   |      
|                                                                              |       |                |         |       |      |  
|Included in the accompanying balance sheets under the following
    captions: |       |                |         |       |      |   |         |      
|Contract costs and estimated earnings in excess of billings                   |       | $              | 8,803   |       |      | $ | 4,860   |      
|Billings in excess of contract costs and estimated earnings                   |       |                | (4,482  | )     |      |   | (342    | )    
|                                                                              |       |                |         |       |      |  
|                                                                              | Total |                | $       | 4,321 |      |   | $       | 4,518 | 
|                                                                              |       |                |         |       |      |  



|   |                
|-- | ---------------
|4. | LINES OF CREDIT

Revolving lines of credit






|   |             
|-- | ------------
|5. | INCOME TAXES



|                           |  |                |         |  |      |   |        |      |  |   |        | 
|-------------------------- |  | -------------- | ------- |  | ---- | - | ------ | ---- |  | - | ------ | 
|                           |  | 2005           |         |  | 2004 |   |        | 2003 | 
|                           |  |                |         |  |      |   |        |      | 
|                           |  | (In thousands) |        
|United States              |  | $              | 54,232  |  |      | $ | 28,804 |      |  | $ | 15,952 | 
|Foreign                    |  |                | 55,348  |  |      |   | 38,380 |      |  |   | 17,699 | 
|                           |  |                |         |  |      |   |        |      | 
|Income before income taxes |  | $              | 109,580 |  |      | $ | 67,184 |      |  | $ | 33,651 | 
|                           |  |                |         |  |      |   |        |      | 

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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|               |          |                |   |        |        |  |   |        |        |  |   |        |       | 
|-------------- | -------- | -------------- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ----- | 
|               |          | 2005           |   |        | 2004   |  |   | 2003   |       
|               |          |                |   |        |        |  |   |        |       
|               |          | (In thousands) |  
|United States: |          |                |   |        |        |  |   |        |        |  |   |       
|               | Current  |                | $ | 12,425 |        |  | $ | 5,563  |        |  | $ | 3,959  |      
|               | Deferred |                |   | 7,596  |        |  |   | 1,965  |        |  |   | (1,945 | )    
|Foreign:       |          |                |   |        |        |  |   |        |        |  |   |       
|               | Current  |                |   | 16,359 |        |  |   | 12,007 |        |  |   | 5,653  |      
|               | Deferred |                |   | (43    | )      |  |   | 1,162  |        |  |   | 406    |      
|               |          |                |   |        |        |  |   |        |       
|               |          | Total          |   | $      | 36,337 |  |   | $      | 20,697 |  |   | $      | 8,073 | 
|               |          |                |   |        |        |  |   |        |       





|                                        |                |      |      |      |      |  |      |      |   |  |       |      |  
|--------------------------------------- | -------------- | ---- | ---- | ---- | ---- |  | ---- | ---- | - |  | ----- | ---- | -
|                                        |                | 2005 |      |      | 2004 |  |      | 2003 |  
|                                        |                |      |      |      |      |  |      |      |  
|Statutory rate                          |                |      | 35.0 | %    |      |  | 35.0 | %    |   |  | 35.0  | %   
|Nondeductible expenses                  |                |      | 0.1  | %    |      |  | 0.1  | %    |   |  | 0.2   | %   
|Research and experimentation tax credit |                |      | (0.7 | )%   |      |  | (2.1 | )%   |   |  | (11.0 | )%  
|Extraterritorial income exclusion       |                |      | (0.3 | )%   |      |  | (2.3 | )%   |   |  | (0.2  | )%  
|Manufacturing deduction                 |                |      | (0.2 | )%   |      |  |     |      |   |  |      |     
|Tax exempt interest                     |                |      | (0.7 | )%   |      |  |     |      |   |  |      |     
|                                        |                |      |      |      |      |  |      |      |  
|                                        | Effective rate |      |      | 33.2 | %    |  |      | 30.7 | % |  |       | 24.0 | %
|                                        |                |      |      |      |      |  |      |      |  

58



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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                 |                              |                |        |         |      |   |        |         |  
|---------------------------------------------------------------- | ---------------------------- | -------------- | ------ | ------- | ---- | - | ------ | ------- | -
|                                                                 |                              | 2005           |        |         | 2004 |  
|                                                                 |                              |                |        |         |      |  
|                                                                 |                              | (In thousands) |       
|Deferred tax assets:                                             |                              |                |        |         |      |   |        |        
|Inventory capitalization cost                                    |                              | $              | 3,622  |         |      | $ | 2,433  |        
|Accrued expenses and other items not deductible for tax purposes |                              |                | 7,583  |         |      |   | 7,823  |        
|Alternative minimum tax and research credits                     |                              |                | 701    |         |      |   | 12,624 |        
|Other                                                            |                              |                | 4,932  |         |      |   | 2,568  |        
|                                                                 |                              |                |        |         |      |  
|                                                                 | Total deferred tax assets    |                |        | 16,838  |      |   |        | 25,448  |  
|Deferred tax liabilities:                                        |                              |                |        |         |      |   |        |        
|Property, plant and equipment                                    |                              |                | (5,776 | )       |      |   | (7,267 | )      
|Unrepatriated foreign earnings and other foreign deferred taxes  |                              |                | (9,039 | )       |      |   | (9,208 | )      
|                                                                 |                              |                |        |         |      |  
|                                                                 | Total deferred tax liability |                |        | (14,815 | )    |   |        | (16,475 | )
|                                                                 |                              |                |        |         |      |  
|Net deferred tax asset                                           |                              | $              | 2,023  |         |      | $ | 8,973  |        
|                                                                 |                              |                |        |         |      |  









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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                  
|-- | -----------------
|6. | EMPLOYEE BENEFITS

Post Retirement Benefits






|                                               |                                   |                                          |        |                 |                     |   |        |       |        |   |       |        |        |   |       |        |        |  
|---------------------------------------------- | --------------------------------- | ---------------------------------------- | ------ | --------------- | ------------------- | - | ------ | ----- | ------ | - | ----- | ------ | ------ | - | ----- | ------ | ------ | -
|                                               |                                   |                                          |        | Post Retirement |                    
|                                               |                                   | Defined Benefit Plan                     |        |                 | Health and Benefits |  
|                                               |                                   |                                          |        |                 |                     |  
|                                               |                                   | 2005                                     |        |                 | 2004                |   |        | 2005  |        |   | 2004  |       
|                                               |                                   |                                          |        |                 |                     |   |        |       |        |   |       |       
|                                               |                                   | (In thousands)                           |       
|Change in benefit obligation:                  |                                   |                                          |        |                 |                     |   |        |       |        |   |       |        |        |   |       |       
|Benefit obligation at beginning of year        |                                   | $                                        | 31,998 |                 |                     | $ | 30,589 |       |        | $ | 5,858 |        |        | $ | 6,902 |       
|                                               | Service cost                      |                                          |        |                |                     |   |        |      |        |   |       | 56     |        |   |       | 50     |       
|                                               | Interest cost                     |                                          |        | 1,920           |                     |   |        | 1,828 |        |   |       | 326    |        |   |       | 347    |       
|                                               | Participant contributions         |                                          |        |                |                     |   |        |      |        |   |       | 61     |        |   |       | 60     |       
|                                               | Benefits paid                     |                                          |        | (798            | )                   |   |        | (674  | )      |   |       | (615   | )      |   |       | (711   | )     
|                                               | Actuarial (gain)/loss             |                                          |        | 1,359           |                     |   |        | 255   |        |   |       | 145    |        |   |       | (790   | )     
|                                               |                                   |                                          |        |                 |                     |   |        |       |        |   |       |       
|                                               |                                   | Benefit obligation at end of year        |        | $               | 34,479              |   |        | $     | 31,998 |   |       | $      | 5,831  |   |       | $      | 5,858  |  
|                                               |                                   |                                          |        |                 |                     |   |        |       |        |   |       |       
|Change in plan assets:                         |                                   |                                          |        |                 |                     |   |        |       |        |   |       |        |        |   |       |       
|Fair value of plan assets at beginning of year |                                   | $                                        | 31,159 |                 |                     | $ | 29,710 |       |        | $ |      |        |        | $ |      |       
|                                               | Actual return on plan assets      |                                          |        | 1,315           |                     |   |        | 2,160 |        |   |       |       |        |   |       |       |       
|                                               | Employer contributions            |                                          |        | 39              |                     |   |        |      |        |   |       | 554    |        |   |       | 651    |       
|                                               | Participant contributions         |                                          |        |                |                     |   |        |      |        |   |       | 61     |        |   |       | 60     |       
|                                               | Benefits paid                     |                                          |        | (797            | )                   |   |        | (674  | )      |   |       | (615   | )      |   |       | (711   | )     
|                                               | Administrative expenses           |                                          |        | (40             | )                   |   |        | (37   | )      |   |       |       |        |   |       |       |       
|                                               |                                   |                                          |        |                 |                     |   |        |       |        |   |       |       
|                                               |                                   | Fair value of plan assets at end of year |        | $               | 31,676              |   |        | $     | 31,159 |   |       | $      |       |   |       | $      |       |  
|                                               |                                   |                                          |        |                 |                     |   |        |       |        |   |       |       
|Reconciliation of plan funded status:          |                                   |                                          |        |                 |                     |   |        |       |        |   |       |        |        |   |       |       
|                                               | Funded status                     |                                          | $      | (2,803          | )                   |   | $      | (839  | )      |   | $     | (5,831 | )      |   | $     | (5,858 | )     
|                                               | Unrecognized actuarial loss       |                                          |        |                |                     |   |        |      |        |   |       | (33    | )      |   |       | (177   | )     
|                                               | Unamortized prior service benefit |                                          |        |                |                     |   |        |      |        |   |       | (1,651 | )      |   |       | (2,139 | )     
|                                               |                                   |                                          |        |                 |                     |   |        |       |        |   |       |       
|                                               |                                   | Net amount recognized at year-end        |        | $               | (2,803              | ) |        | $     | (839   | ) |       | $      | (7,515 | ) |       | $      | (8,174 | )
|                                               |                                   |                                          |        |                 |                     |   |        |       |        |   |       |       

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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                         |                                              |                           |   |                            |               |  |   |        |     |  |      |        |     |      |   |      |      |   |   |      |     |   |   |      |     |  
|---------------------------------------- | -------------------------------------------- | ------------------------- | - | -------------------------- | ------------- |  | - | ------ | --- |  | ---- | ------ | --- | ---- | - | ---- | ---- | - | - | ---- | --- | - | - | ---- | --- | -
|                                         |                                              |                           |   | Post Retirement Health and |              
|                                         |                                              | Defined Benefit Plan      |   |                            | Life Benefits | 
|                                         |                                              |                           |   |                            |               | 
|                                         |                                              | 2005                      |   |                            | 2004          |  |   | 2003   |     |  | 2005 |        |     | 2004 |   |      | 2003 |  
|                                         |                                              |                           |   |                            |               |  |   |        |     |  |      |        |     |      |   |      |      |  
|                                         |                                              | (In thousands)            |  
|Components of net periodic benefit cost: |                                              |                           |   |                            |               |  |   |        |     |  |      |        |     |      |   |      |      |   |   |      |     |   |   |     
|                                         | Service cost                                 |                           | $ |                           |               |  | $ |       |     |  | $    |       |     |      | $ | 56   |      |   | $ | 50   |     |   | $ | 56   |    
|                                         | Interest cost                                |                           |   | 1,920                      |               |  |   | 1,828  |     |  |      | 1,747  |     |      |   | 326  |      |   |   | 347  |     |   |   | 403  |    
|                                         | Expected return on plan assets               |                           |   | (1,843                     | )             |  |   | (1,760 | )   |  |      | (1,755 | )   |      |   |     |      |   |   |     |     |   |   |     |    
|                                         | Amortization of prior service cost (benefit) |                           |   | 16                         |               |  |   | 16     |     |  |      | 16     |     |      |   | (487 | )    |   |   | (488 | )   |   |   | (488 | )  
|                                         | Amortization of net loss                     |                           |   | 14                         |               |  |   | 20     |     |  |      | 129    |     |      |   |     |      |   |   |     |     |   |   |     |    
|                                         |                                              |                           |   |                            |               |  |   |        |     |  |      |        |     |      |   |      |      |  
|                                         |                                              | Net periodic benefit cost |   | $                          | 107           |  |   | $      | 104 |  |      | $      | 137 |      |   | $    | (105 | ) |   | $    | (91 | ) |   | $    | (29 | )
|                                         |                                              |                           |   |                            |               |  |   |        |     |  |      |        |     |      |   |      |      |  



|                           |              |                      |  |    |      |   |  |    |     |  
|-------------------------- | ------------ | -------------------- |  | -- | ---- | - |  | -- | --- | -
|                           |              | Defined Benefit Plan | 
|                           |              |                      | 
|                           |              | 2005                 |  |    | 2004 |  
|                           |              |                      |  |    |      |  
|Percentage of Plan Assets: |              |                      |  |    |      |   |  |   
|                           | Equity       |                      |  | 32 | %    |   |  | 31 | %  
|                           | Fixed income |                      |  | 68 | %    |   |  | 69 | %  
|                           |              |                      |  |    |      |  
|                           |              | Total                |  |    | 100  | % |  |    | 100 | %



|                                             |  |                      |        |   |      |   |       |  
|-------------------------------------------- |  | -------------------- | ------ | - | ---- | - | ----- | -
|                                             |  | Defined Benefit Plan |       
|                                             |  |                      |       
|                                             |  | 2005                 |        |   | 2004 |  
|                                             |  |                      |        |   |      |  
|                                             |  | (In thousands)       |       
|Accrued benefit liability                    |  | $                    | (2,803 | ) |      | $ | (839  | )
|Intangible asset                             |  |                      | 103    |   |      |   | 119   |  
|Accumulated other comprehensive income       |  |                      | 4,863  |   |      |   | 2,899 |  
|                                             |  |                      |        |   |      |  
|Net amount recognized at the end of the year |  | $                    | 2,163  |   |      | $ | 2,179 |  
|                                             |  |                      |        |   |      |  



|                                         |  |                      |        |  |      |   |        | 
|---------------------------------------- |  | -------------------- | ------ |  | ---- | - | ------ | 
|                                         |  | Defined Benefit Plan |       
|                                         |  |                      |       
|                                         |  | 2005                 |        |  | 2004 |  
|                                         |  |                      |        |  |      |  
|                                         |  | (In thousands)       |       
|Projected benefit obligation             |  | $                    | 34,479 |  |      | $ | 31,998 | 
|Accumulated benefit obligation           |  |                      | 34,479 |  |      |   | 31,998 | 
|Fair value of plan assets at end of year |  |                      | 31,676 |  |      |   | 31,159 | 



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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                 |  |                |     |  |          |   |      |  
|---------------------------------------------------------------- |  | -------------- | --- |  | -------- | - | ---- | -
|                                                                 |  | One Percent    |    
|                                                                 |  |                |    
|                                                                 |  | Increase       |     |  | Decrease |  
|                                                                 |  |                |     |  |          |  
|                                                                 |  | (In thousands) |    
|Effect on total of service and interest cost components for 2005 |  | $              | 7   |  |          | $ | (7   | )
|Effect on December 31, 2005 benefit obligation                   |  |                | 117 |  |          |   | (112 | )

Defined Contribution Plans




Nonqualified Deferred Compensation
Arrangement


Other




|   |                     
|-- | --------------------
|7. | STOCKHOLDERS EQUITY

Common Stock




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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Preferred Stock


Registration Rights Agreement


Rights Agreement






Employee Stock Purchase Plan


Other


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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                         
|-- | ------------------------
|8. | OTHER COMPREHENSIVE LOSS





|   |                         
|-- | ------------------------
|9. | OTHER INCOME AND EXPENSE





|    |                   
|--- | ------------------
|10. | EARNINGS PER SHARE



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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                     |  |                                      |        |          |         |  |        |           |  |   |      | 
|------------------------------------ |  | ------------------------------------ | ------ | -------- | ------- |  | ------ | --------- |  | - | ---- | 
|                                     |  |                                      |        | Weighted |         |  |       
|                                     |  | Net                                  |        |          | Average |  |        | Earnings  | 
|                                     |  | Income                               |        |          | Shares  |  |        | Per Share | 
|                                     |  |                                      |        |          |         |  |        |           | 
|                                     |  | (In thousands except per share data) |       
|For the year ended December 31, 2003 |  |                                      |        |          |         |  |        |           |  |   |      | 
|Basic net income                     |  | $                                    | 25,578 |          |         |  | 22,711 |           |  | $ | 1.13 | 
|Effect of dilutive stock options     |  |                                      |       |          |         |  | 290    |           |  |   |     | 
|                                     |  |                                      |        |          |         |  |        |           | 
|Diluted net income                   |  | $                                    | 25,578 |          |         |  | 23,001 |           |  | $ | 1.11 | 
|                                     |  |                                      |        |          |         |  |        |           | 
|For the year ended December 31, 2004 |  |                                      |        |          |         |  |        |           |  |   |      | 
|Basic net income                     |  | $                                    | 46,487 |          |         |  | 22,996 |           |  | $ | 2.02 | 
|Effect of dilutive stock options     |  |                                      |       |          |         |  | 436    |           |  |   |     | 
|                                     |  |                                      |        |          |         |  |        |           | 
|Diluted net income                   |  | $                                    | 46,487 |          |         |  | 23,432 |           |  | $ | 1.98 | 
|                                     |  |                                      |        |          |         |  |        |           | 
|For the year ended December 31, 2005 |  |                                      |        |          |         |  |        |           |  |   |      | 
|Basic net income                     |  | $                                    | 73,243 |          |         |  | 23,501 |           |  | $ | 3.12 | 
|Effect of dilutive stock options     |  |                                      |       |          |         |  | 518    |           |  |   |     | 
|                                     |  |                                      |        |          |         |  |        |           | 
|Diluted net income                   |  | $                                    | 73,243 |          |         |  | 24,019 |           |  | $ | 3.05 | 
|                                     |  |                                      |        |          |         |  |        |           | 



|    |                              
|--- | -----------------------------
|11. | COMMITMENTS AND CONTINGENCIES

Leases




|                        |                              |                |       |       | 
|----------------------- | ---------------------------- | -------------- | ----- | ----- | 
|                        |                              | Operating      |      
|                        |                              |                |      
|                        |                              | (In thousands) |      
|2006                    |                              | $              | 1,697 |      
|2007                    |                              |                | 1,152 |      
|2008                    |                              |                | 688   |      
|2009                    |                              |                | 139   |      
|2010                    |                              |                |      |      
|Greater than five years |                              |                |      |      
|                        |                              |                |      
|                        | Total minimum lease payments |                | $     | 3,676 | 
|                        |                              |                |      



Litigation




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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Other




|    |                                    
|--- | -----------------------------------
|12. | FAIR VALUE OF FINANCIAL INSTRUMENTS





|    |                          
|--- | -------------------------
|13. | EQUITY COMPENSATION PLANS









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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                         |  |        |           |                  |                |   |       | 
|---------------------------------------- |  | ------ | --------- | ---------------- | -------------- | - | ----- | 
|                                         |  |        |           | Weighted Average |               
|                                         |  | Shares |           |                  | Exercise Price |  
|                                         |  |        |           |                  |                |  
|Outstanding at December 31, 2002         |  |        | 1,426,652 |                  |                | $ | 17.02 | 
|                                         |  |        |           |                  |                |  
|Granted                                  |  |        | 213,140   |                  |                |   | 27.21 | 
|Exercised                                |  |        | (243,034  | )                |                |   | 8.11  | 
|Forfeited                                |  |        | (56,161   | )                |                |   | 19.35 | 
|                                         |  |        |           |                  |                |  
|Outstanding at December 31, 2003         |  |        | 1,340,597 |                  |                | $ | 20.16 | 
|                                         |  |        |           |                  |                |  
|Granted                                  |  |        | 236,200   |                  |                |   | 28.97 | 
|Exercised                                |  |        | (432,971  | )                |                |   | 17.49 | 
|Forfeited                                |  |        | (74,220   | )                |                |   | 22.76 | 
|                                         |  |        |           |                  |                |  
|Outstanding at December 31, 2004         |  |        | 1,069,606 |                  |                | $ | 23.01 | 
|                                         |  |        |           |                  |                |  
|Granted                                  |  |        |          |                  |                |   |      | 
|Exercised                                |  |        | (381,063  | )                |                |   | 19.74 | 
|Forfeited                                |  |        | (28,200   | )                |                |   | 23.26 | 
|                                         |  |        |           |                  |                |  
|Outstanding at December 31, 2005         |  |        | 660,343   |                  |                | $ | 24.89 | 
|                                         |  |        |           |                  |                |  
|Options exercisable at December 31, 2003 |  |        | 515,523   |                  |                | $ | 17.02 | 
|Options exercisable at December 31, 2004 |  |        | 344,006   |                  |                | $ | 19.52 | 
|Options exercisable at December 31, 2005 |  |        | 243,135   |                  |                | $ | 22.59 | 



|                         |  |        |         |                  |                  |  |                  |                |  |                  |                   |  |             |        |         |  |  |   |       | 
|------------------------ |  | ------ | ------- | ---------------- | ---------------- |  | ---------------- | -------------- |  | ---------------- | ----------------- |  | ----------- | ------ | ------- |  |  | - | ----- | 
|                         |  |        |         |                  |                  |  |                  |                |  | Weighted Average |                  
|                         |  |        |         | Weighted Average |                  |  |                  |                |  |                  | Exercise Price of | 
|                         |  |        |         | Remaining        |                  |  | Weighted Average |                |  | Exercisable      |                   |  | Exercisable |       
|Range of Exercise Prices |  | Shares |         |                  | Contractual Life |  |                  | Exercise Price |  |                  | Shares            |  |             | Shares |        
|                         |  |        |         |                  |                  |  |                  |                |  |                  |                   |  |             |        |        
|$16.70-$21.20            |  |        | 213,188 |                  |                  |  | 5.5              |                |  | $                | 18.84             |  |             |        | 131,188 |  |  | $ | 18.49 | 
|$23.37-$26.71            |  |        | 83,224  |                  |                  |  | 6.4              |                |  |                  | 25.42             |  |             |        | 31,747  |  |  |   | 25.49 | 
|$26.71-$30.05            |  |        | 349,543 |                  |                  |  | 7.9              |                |  |                  | 28.14             |  |             |        | 73,332  |  |  |   | 27.89 | 
|$30.05-$33.39            |  |        | 14,388  |                  |                  |  | 7.5              |                |  |                  | 32.24             |  |             |        | 6,868   |  |  |   | 30.98 | 
|                         |  |        |         |                  |                  |  |                  |                |  |                  |                   |  |             |        |        
|                         |  |        | 660,343 |                  |                  |  | 6.9              |                |  | $                | 24.89             |  |             |        | 243,135 |  |  | $ | 22.59 | 
|                         |  |        |         |                  |                  |  |                  |                |  |                  |                   |  |             |        |        



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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














|    |                                
|--- | -------------------------------
|14. | SEGMENT AND RELATED INFORMATION







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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                              |                          |                         |   |         |         |  |   |         |         |  |   |         |         | 
|----------------------------- | ------------------------ | ----------------------- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                              |                          | Year Ended December 31, |  
|                              |                          |                         |  
|                              |                          | 2005                    |   |         | 2004    |  |   | 2003    |        
|                              |                          |                         |   |         |         |  |   |         |        
|                              |                          | (In thousands)          |  
|Revenue                       |                          |                         |   |         |         |  |   |         |         |  |   |        
|                              | Premium Connection       |                         | $ | 246,470 |         |  | $ | 184,782 |         |  | $ | 110,270 |        
|                              | Pressure Control         |                         |   | 130,254 |         |  |   | 100,571 |         |  |   | 101,747 |        
|                              |                          |                         |   |         |         |  |   |         |        
|                              |                          | Total                   |   | $       | 376,724 |  |   | $       | 285,353 |  |   | $       | 212,017 | 
|                              |                          |                         |   |         |         |  |   |         |        
|Operating income (loss)       |                          |                         |   |         |         |  |   |         |         |  |   |        
|                              | Premium Connection       |                         | $ | 85,054  |         |  | $ | 60,899  |         |  | $ | 27,611  |        
|                              | Pressure Control         |                         |   | 37,381  |         |  |   | 20,971  |         |  |   | 20,261  |        
|                              | Corporate Administration |                         |   | (17,479 | )       |  |   | (15,464 | )       |  |   | (13,709 | )      
|                              |                          |                         |   |         |         |  |   |         |        
|                              |                          | Total                   |   | $       | 104,956 |  |   | $       | 66,406  |  |   | $       | 34,163  | 
|                              |                          |                         |   |         |         |  |   |         |        
|Depreciation and amortization |                          |                         |   |         |         |  |   |         |         |  |   |        
|                              | Premium Connection       |                         | $ | 8,587   |         |  | $ | 7,815   |         |  | $ | 7,367   |        
|                              | Pressure Control         |                         |   | 3,116   |         |  |   | 2,920   |         |  |   | 2,769   |        
|                              | Corporate Administration |                         |   | 1,984   |         |  |   | 1,902   |         |  |   | 1,764   |        
|                              |                          |                         |   |         |         |  |   |         |        
|                              |                          | Total                   |   | $       | 13,687  |  |   | $       | 12,637  |  |   | $       | 11,900  | 
|                              |                          |                         |   |         |         |  |   |         |        
|Capital expenditures          |                          |                         |   |         |         |  |   |         |         |  |   |        
|                              | Premium Connection       |                         | $ | 12,041  |         |  | $ | 8,188   |         |  | $ | 3,699   |        
|                              | Pressure Control         |                         |   | 4,475   |         |  |   | 2,390   |         |  |   | 3,548   |        
|                              | Corporate Administration |                         |   | 628     |         |  |   | 1,778   |         |  |   | 1,311   |        
|                              |                          |                         |   |         |         |  |   |         |        
|                              |                          | Total                   |   | $       | 17,144  |  |   | $       | 12,356  |  |   | $       | 8,558   | 
|                              |                          |                         |   |         |         |  |   |         |        
|Total assets                  |                          |                         |   |         |         |  |   |         |         |  |   |        
|                              | Premium Connection       |                         | $ | 142,414 |         |  | $ | 121,333 |         |  | $ | 98,071  |        
|                              | Pressure Control         |                         |   | 96,193  |         |  |   | 68,900  |         |  |   | 73,375  |        
|                              | Corporate Administration |                         |   | 211,955 |         |  |   | 153,413 |         |  |   | 95,670  |        
|                              |                          |                         |   |         |         |  |   |         |        
|                              |                          | Total                   |   | $       | 450,562 |  |   | $       | 343,646 |  |   | $       | 267,116 | 
|                              |                          |                         |   |         |         |  |   |         |        

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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                     |                          |                             |   |         |         |  |   |         |         |  |   |         |         | 
|-------------------- | ------------------------ | --------------------------- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                     |                          | Year Ended December 31,     |  
|                     |                          |                             |  
|                     |                          | 2005                        |   |         | 2004    |  |   | 2003    |        
|                     |                          |                             |   |         |         |  |   |         |        
|                     |                          | (In thousands)              |  
|Revenue(1)           |                          |                             |   |         |         |  |   |         |         |  |   |        
|                     | United States            |                             | $ | 185,990 |         |  | $ | 141,418 |         |  | $ | 132,960 |        
|                     | Other Western Hemisphere |                             |   | 72,987  |         |  |   | 59,656  |         |  |   | 35,355  |        
|                     |                          |                             |   |         |         |  |   |         |        
|                     |                          | Subtotal Western Hemisphere |   |         | 258,977 |  |   |         | 201,074 |  |   |         | 168,315 | 
|                     | Eastern Hemisphere       |                             |   | 117,747 |         |  |   | 84,279  |         |  |   | 43,702  |        
|                     |                          |                             |   |         |         |  |   |         |        
|                     |                          | Total                       |   | $       | 376,724 |  |   | $       | 285,353 |  |   | $       | 212,017 | 
|                     |                          |                             |   |         |         |  |   |         |        
|Long-lived assets(2) |                          |                             |   |         |         |  |   |         |         |  |   |        
|                     | United States            |                             | $ | 86,248  |         |  | $ | 81,063  |         |  | $ | 83,447  |        
|                     | Other Western Hemisphere |                             |   | 19,450  |         |  |   | 18,337  |         |  |   | 15,961  |        
|                     |                          |                             |   |         |         |  |   |         |        
|                     |                          | Subtotal Western Hemisphere |   |         | 105,698 |  |   |         | 99,400  |  |   |         | 99,408  | 
|                     | Eastern Hemisphere       |                             |   | 9,302   |         |  |   | 9,583   |         |  |   | 11,288  |        
|                     |                          |                             |   |         |         |  |   |         |        
|                     |                          | Total                       |   | $       | 115,000 |  |   | $       | 108,983 |  |   | $       | 110,696 | 
|                     |                          |                             |   |         |         |  |   |         |        






|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|(1) | Revenue is presented on the basis of selling location.                                               
|   
|(2) | Includes net property and other long-term assets, (excludes
    investments and deferred tax assets).









|    |                                                  
|--- | -------------------------------------------------
|15. | SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)

|                    |         |                                       |        |      |         |   |        |         |  |   |         |      |  |   |         |      | 
|------------------- | ------- | ------------------------------------- | ------ | ---- | ------- | - | ------ | ------- |  | - | ------- | ---- |  | - | ------- | ---- | 
|                    |         | Year Ended December 31, 2005          |       
|                    |         |                                       |       
|                    |         | First                                 |        |      | Second  |   |        | Third   |  |   | Fourth  |     
|                    |         | Quarter                               |        |      | Quarter |   |        | Quarter |  |   | Quarter |     
|                    |         |                                       |        |      |         |   |        |         |  |   |         |     
|                    |         | (In thousands, except per share data) |       
|Revenue             |         | $                                     | 78,817 |      |         | $ | 91,607 |         |  | $ | 92,974  |      |  | $ | 113,326 |     
|Gross profit        |         |                                       | 35,407 |      |         |   | 40,465 |         |  |   | 41,284  |      |  |   | 46,407  |     
|Operating income    |         |                                       | 22,099 |      |         |   | 24,997 |         |  |   | 27,175  |      |  |   | 30,685  |     
|Net income(1)       |         |                                       | 15,012 |      |         |   | 17,249 |         |  |   | 19,612  |      |  |   | 21,370  |     
|Earnings per share: |         |                                       |        |      |         |   |        |         |  |   |         |      |  |   |         |     
|                    | Basic   |                                       | $      | 0.64 |         |   | $      | 0.74    |  |   | $       | 0.83 |  |   | $       | 0.90 | 
|                    | Diluted |                                       | $      | 0.63 |         |   | $      | 0.72    |  |   | $       | 0.81 |  |   | $       | 0.88 | 

70



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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                    |         |                                       |        |      |         |   |        |         |  |   |         |      |  |   |        |      | 
|------------------- | ------- | ------------------------------------- | ------ | ---- | ------- | - | ------ | ------- |  | - | ------- | ---- |  | - | ------ | ---- | 
|                    |         | Year Ended December 31, 2004          |       
|                    |         |                                       |       
|                    |         | First                                 |        |      | Second  |   |        | Third   |  |   | Fourth  |     
|                    |         | Quarter                               |        |      | Quarter |   |        | Quarter |  |   | Quarter |     
|                    |         |                                       |        |      |         |   |        |         |  |   |         |     
|                    |         | (In thousands, except per share data) |       
|Revenue             |         | $                                     | 57,497 |      |         | $ | 62,905 |         |  | $ | 78,427  |      |  | $ | 86,524 |     
|Gross profit        |         |                                       | 22,350 |      |         |   | 26,071 |         |  |   | 33,076  |      |  |   | 36,916 |     
|Operating income    |         |                                       | 10,457 |      |         |   | 13,368 |         |  |   | 19,768  |      |  |   | 22,813 |     
|Net income(2)       |         |                                       | 7,874  |      |         |   | 9,023  |         |  |   | 14,441  |      |  |   | 15,149 |     
|Earnings per share: |         |                                       |        |      |         |   |        |         |  |   |         |      |  |   |        |     
|                    | Basic   |                                       | $      | 0.34 |         |   | $      | 0.39    |  |   | $       | 0.63 |  |   | $      | 0.65 | 
|                    | Diluted |                                       | $      | 0.34 |         |   | $      | 0.39    |  |   | $       | 0.61 |  |   | $      | 0.64 | 






|    |                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The third quarter 2005 includes a $2,199,000 gain on the sale of
    real estate not used in operations.                                                                                                                                                                                                                                                                
|   
|(2) | The first quarter 2004 includes a U.S. research and
    experimentation income tax credit of $920,000 related to
    qualified spending for the two-year period from 2002 and 2003.
    The third quarter 2004 includes a U.S. income tax benefit
    (extraterritorial income exclusion) of $1,300,000 related to
    export shipments for the years 2002 through 2003.



|    |                                 
|--- | --------------------------------
|16. | RECENT ACCOUNTING PRONOUNCEMENTS







71



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








106-2, 106-2). 106-2 106-2 106-2




72



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##### Table of Contents






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







ITEM 9A  CONTROLS AND PROCEDURES


10-K 10-K.





ITEM 9B  OTHER INFORMATION







PART III







ITEM 10  DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT


10-K, S-K


S-K 8-K S-K





ITEM 11  EXECUTIVE COMPENSATION




73



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##### Table of Contents






ITEM 12  SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS







ITEM 13  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS







ITEM 14  PRINCIPAL ACCOUNTING FEES AND
SERVICES







PART IV





ITEM 15  EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES






| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Financial Statements                                                                                                                         
|
| | All financial statements of the Registrant as set forth under
    Item 8 of this Annual Report on
    Form 10-K.                                
|
| | 2. Financial Statement Schedules                                                                                                                
|
| | All schedules have been omitted because either they are not
    applicable or the required information is shown in the financial
    statements.
|
| | 3. Exhibits                                                                                                                                     

|        |    |      |  |   |  |                                                                                                                                                                                                                                                                      
|------- | -- | ---- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |  
|No.     |    |      |  |  
|        |    |      |  |  
|        | 3  | .1*  |  |  |  | Restated Certificate of Incorporation of the Company
    (incorporated by reference to Exhibit 3.1 of the
    Companys Form 10-Q filed with the Commission on
    November 14, 2000).                                                                               
|        | 3  | .2*  |  |  |  | Restated Bylaws of the Company (incorporated by reference to
    Exhibit 3.2 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).                                                        
|        | 4  | .1*  |  |  |  | Form of Specimen Common Stock Certificate (incorporated by
    reference to Exhibit 4.1 of Amendment No. 1 to the
    Registration Statement on Form S-1 of the Company filed
    with the Commission on July 31, 2000).                                             
|        | 4  | .2*  |  |  |  | Registration Rights Agreement among the Company and the
    stockholders named therein (incorporated by reference to
    Exhibit 4.2 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).
|        | 10 | .1*  |  |  |  | Loan Agreement dated as of June 30, 2003 among Hydril
    Company, Banc One Capital Markets, Inc. and Bank One, NA.
    (incorporated by reference to exhibit 10.1 of the
    Companys Form 10-Q dated June 30, 2003).                                              
|        | 10 | .2*+ |  |  |  | Employment Agreement with Neil Russell dated October 1,
    2002 (incorporated by reference to Exhibit 10.1 of the
    Companys Form 10-Q for the quarter ended
    September 30, 2002).                                                                            
|        | 10 | .3*+ |  |  |  | Employment Agreement with Neil Russell dated March 12, 2004
    (incorporated by reference to Exhibit 10.3 of the
    Companys Form 10-K for the year-ended
    December 31, 2004).                                                                                 

74



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##### Table of Contents



|        |    |       |  |   |  |                                                                                                                                                                                                                                       
|------- | -- | ----- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |  
|No.     |    |       |  |  
|        |    |       |  |  
|        | 10 | .4*+  |  |  |  | Hydril Company 1999 Stock Option Plan (incorporated by reference
    to Exhibit 10.1 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).                 
|        | 10 | .5*+  |  |  |  | Hydril Company 2000 Incentive Plan (incorporated by reference to
    Exhibit 10.3 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).                    
|        | 10 | .6*+  |  |  |  | Amendment to Hydril Company 2000 Incentive Plan (incorporated by
    reference to Exhibit 10.5 of the Companys
    Form 10-K for the year-ended December 31, 2003).                                                                  
|        | 10 | .7*+  |  |  |  | Form of Stock Option Award Agreement for Employees under the
    Hydril Company 2000 Incentive Plan (incorporated by reference to
    Exhibit 10.7 of the Companys Form 10-K for the
    year-ended December 31, 2004).              
|        | 10 | .8*+  |  |  |  | Form of Stock Option Award Agreement for Non-employee Directors
    under the Hydril Company 2000 Incentive Plan (incorporated by
    reference to Exhibit 10.8 of the Companys
    Form 10-K for the year-ended December 31, 2004). 
|        | 10 | .9*+  |  |  |  | Form of Restricted Stock Unit Award Agreement for Employees
    under the Hydril Company 2000 Incentive Plan (incorporated by
    reference to Exhibit 10.9 of the Companys
    Form 10-K for the year-ended December 31, 2004).     
|        | 10 | .10*+ |  |  |  | Form of Restricted Stock Award Agreement for Employees under the
    Hydril Company 2000 Incentive Plan (incorporated by reference to
    Exhibit 10.10 of the Companys Form 10-K for the
    year-ended December 31, 2004).         
|        | 10 | .11*+ |  |  |  | Form of Indemnification Agreement (incorporated by reference to
    Exhibit 10.5 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).                     
|        | 10 | .12*+ |  |  |  | Employee Stock Purchase Plan (incorporated by reference to
    Exhibit 10.6 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).                          
|        | 10 | .13*+ |  |  |  | Hydril Company Restoration Plan (incorporated by reference to
    Exhibit 10.13 of the Companys Form 10-K for the
    year-ended December 31, 2001).                                                                                 
|        | 10 | .14*+ |  |  |  | Form of Change in Control Agreement (incorporated by reference
    to Exhibit 10.14 of the Companys Form 10-Q for
    the quarter ended June 30, 2004).                                                                              
|        | 10 | .15+  |  |  |  | Description of Non-employee Director Compensation.                                                                                                                                                                                    
|        | 10 | .16*+ |  |  |  | Executive Officer 2006 Bonus Criteria under the 2006 Management
    Incentive Plan (incorporated by reference to the Companys
    Form 8-K filed with the Commission on March 10, 2006).                                             
|        | 10 | .17*+ |  |  |  | 2006 Management Incentive Plan (incorporated by reference to
    Exhibit 10.1 of the Companys Form 8-K filed with
    the Commission on March 10, 2006).                                                                             
|        | 10 | .18*+ |  |  |  | Executive Officer Salaries (incorporated by reference to the
    Companys Form 8-K filed with the Commission on
    March 10, 2006).                                                                                                 
|        | 10 | .19*+ |  |  |  | Form of Restricted Stock Unit Agreement (Performance-Based) for
    Employees under the Hydril 2000 Incentive Plan (incorporated by
    reference to Exhibit 10.1 of the Companys
    Form 10-Q for the quarter ended June 30, 2005).
|        | 10 | .20*+ |  |  |  | Hydril Company 2005 Incentive Plan (incorporated by reference to
    Annex A to our Definitive Proxy Statement on
    Schedule 14A filed with the Commission on April 8,
    2005).                                                   
|        | 10 | .21*+ |  |  |  | Form of Deferred Share Unit Award Agreement between Hydril and
    Non-employee Directors (incorporated by reference to
    Exhibit 10.2 of the Companys Form 8-K filed with
    the Commission on May 23, 2005).                    
|        | 10 | .22*+ |  |  |  | Form of Change in Control Renewal Agreement for Executive
    Officers (through December 31, 2006) (incorporated by
    reference to Exhibit 10.1 of the Companys
    Form 8-K filed with the Commission on March 10, 2006).         
|        | 21 | .1    |  |  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                       
|        | 23 | .1    |  |  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                             

75



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##### Table of Contents



|        |    |    |  |   |  |                                                                                                                                                                                                                              
|------- | -- | -- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |  
|No.     |    |    |  |  
|        |    |    |  |  
|        | 24 | .1 |  |  |  | Powers of Attorney.                                                                                                                                                                                                          
|        | 31 | .1 |  |  |  | Certification by Christopher T. Seaver, Chief Executive Officer,
    pursuant to Rule 13a-14(a) of the Securities Exchange Act
    of 1934.                                                                                  
|        | 31 | .2 |  |  |  | Certification by Chris D. North, Chief Financial Officer,
    pursuant to Rule 13a-14(a) of the Securities Exchange Act
    of 1934.                                                                                         
|        | 32 | .1 |  |  |  | Certification by Christopher T. Seaver, Chief Executive Officer,
    pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002  (Subsection (a) and (b) of Section 1350,
    Chapter 63 of Title 18, United States Code).
|        | 32 | .2 |  |  |  | Certification by Chris D. North, Chief Financial Officer,
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    (Subsection (a) and (b) of Section 1350,
    Chapter 63 of Title 18, United States Code).        






|  |  |                                                   
|- |  | --------------------------------------------------
|* |  | Incorporated by reference as indicated.           
| 
|+ |  | Denotes management compensatory plan or agreement.

76



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##### Table of Contents






SIGNATURE


10-K




| |               
| | --------------
| | HYDRIL COMPANY



| |     |                   
| | --- | ------------------
| | By: | /s/ Chris D. North

| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| |                                                                                                
| | Chris D. North                                                                                 
| | Chief Financial Officer (Authorized officer and principal
    accounting and financial officer)

10-K


|                                                   |  |                                                                                                 |  | 
|-------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | 
|Signature                                          |  | Title                                                                                          
|                                                   |  |                                                                                                
|                                                  
|/s/ Christopher T.
    SeaverChristopher T. Seaver |  | President, Chief Executive Officer and Director (Principal
    Executive Officer)              
|                                                  
|/s/ Chris D. NorthChris D. North                   |  | Chief Financial Officer (Authorized Officer and Principal
    Accounting and Financial Officer)
|                                                  
|*Richard C. Seaver                                 |  | Chairman of the Board                                                                          
|                                                  
|*Jerry S. Cox                                      |  | Director                                                                                       
|                                                  
|*Roger Goodan                                      |  | Director                                                                                       
|                                                  
|*Gordon T. Hall                                    |  | Director                                                                                       
|                                                  
|*Kenneth S. McCormick                              |  | Director                                                                                       
|                                                  
|*Patrick T. Seaver                                 |  | Director                                                                                       
|                                                  
|*T. Don Stacy                                      |  | Director                                                                                       
|                                                  
|*Lew O. Ward                                       |  | Director                                                                                       
|                                                  
|*By:                                               |  | /s/ Christopher T.
    SeaverChristopher T. Seaver
    Attorney-in-fact                         |  | 

77



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##### Table of Contents



INDEX TO EXHIBITS


|        |    |       |  |   |  |                                                                                                                                                                                                                                                                      
|------- | -- | ----- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |  
|No.     |    |       |  |  
|        |    |       |  |  
|        | 3  | .1*   |  |  |  | Restated Certificate of Incorporation of the Company
    (incorporated by reference to Exhibit 3.1 of the
    Companys Form 10-Q filed with the Commission on
    November 14, 2000).                                                                               
|        | 3  | .2*   |  |  |  | Restated Bylaws of the Company (incorporated by reference to
    Exhibit 3.2 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).                                                        
|        | 4  | .1*   |  |  |  | Form of Specimen Common Stock Certificate (incorporated by
    reference to Exhibit 4.1 of Amendment No. 1 to the
    Registration Statement on Form S-1 of the Company filed
    with the Commission on July 31, 2000).                                             
|        | 4  | .2*   |  |  |  | Registration Rights Agreement among the Company and the
    stockholders named therein (incorporated by reference to
    Exhibit 4.2 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).
|        | 10 | .1*   |  |  |  | Loan Agreement dated as of June 30, 2003 among Hydril
    Company, Banc One Capital Markets, Inc. and Bank One, NA.
    (incorporated by reference to exhibit 10.1 of the
    Companys Form 10-Q dated June 30, 2003).                                              
|        | 10 | .2*+  |  |  |  | Employment Agreement with Neil Russell dated October 1,
    2002 (incorporated by reference to Exhibit 10.1 of the
    Companys Form 10-Q for the quarter ended
    September 30, 2002).                                                                            
|        | 10 | .3*+  |  |  |  | Employment Agreement with Neil Russell dated March 12, 2004
    (incorporated by reference to Exhibit 10.3 of the
    Companys Form 10-K for the year-ended
    December 31, 2004).                                                                                 
|        | 10 | .4*+  |  |  |  | Hydril Company 1999 Stock Option Plan (incorporated by reference
    to Exhibit 10.1 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).                                                
|        | 10 | .5*+  |  |  |  | Hydril Company 2000 Incentive Plan (incorporated by reference to
    Exhibit 10.3 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).                                                   
|        | 10 | .6*+  |  |  |  | Amendment to Hydril Company 2000 Incentive Plan (incorporated by
    reference to Exhibit 10.5 of the Companys
    Form 10-K for the year-ended December 31, 2003).                                                                                                 
|        | 10 | .7*+  |  |  |  | Form of Stock Option Award Agreement for Employees under the
    Hydril Company 2000 Incentive Plan (incorporated by reference to
    Exhibit 10.7 of the Companys Form 10-K for the
    year-ended December 31, 2004).                                             
|        | 10 | .8*+  |  |  |  | Form of Stock Option Award Agreement for Non-employee Directors
    under the Hydril Company 2000 Incentive Plan (incorporated by
    reference to Exhibit 10.8 of the Companys
    Form 10-K for the year-ended December 31, 2004).                                
|        | 10 | .9*+  |  |  |  | Form of Restricted Stock Unit Award Agreement for Employees
    under the Hydril Company 2000 Incentive Plan (incorporated by
    reference to Exhibit 10.9 of the Companys
    Form 10-K for the year-ended December 31, 2004).                                    
|        | 10 | .10*+ |  |  |  | Form of Restricted Stock Award Agreement for Employees under the
    Hydril Company 2000 Incentive Plan (incorporated by reference to
    Exhibit 10.10 of the Companys Form 10-K for the
    year-ended December 31, 2004).                                        
|        | 10 | .11*+ |  |  |  | Form of Indemnification Agreement (incorporated by reference to
    Exhibit 10.5 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).                                                    
|        | 10 | .12*+ |  |  |  | Employee Stock Purchase Plan (incorporated by reference to
    Exhibit 10.6 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).                                                         
|        | 10 | .13*+ |  |  |  | Hydril Company Restoration Plan (incorporated by reference to
    Exhibit 10.13 of the Companys Form 10-K for the
    year-ended December 31, 2001).                                                                                                                
|        | 10 | .14*+ |  |  |  | Form of Change in Control Agreement (incorporated by reference
    to Exhibit 10.14 of the Companys Form 10-Q for
    the quarter ended June 30, 2004).                                                                                                             
|        | 10 | .15+  |  |  |  | Description of Non-employee Director Compensation.                                                                                                                                                                                                                   
|        | 10 | .16*+ |  |  |  | Executive Officer 2006 Bonus Criteria under the 2006 Management
    Incentive Plan (incorporated by reference to the Companys
    Form 8-K filed with the Commission on March 10, 2006).                                                                            



---



##### Table of Contents



|        |    |       |  |   |  |                                                                                                                                                                                                                                       
|------- | -- | ----- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |  
|No.     |    |       |  |  
|        |    |       |  |  
|        | 10 | .17*+ |  |  |  | 2006 Management Incentive Plan (incorporated by reference to
    Exhibit 10.1 of the Companys Form 8-K filed with
    the Commission on March 10, 2006).                                                                             
|        | 10 | .18*+ |  |  |  | Executive Officer Salaries (incorporated by reference to the
    Companys Form 8-K filed with the Commission on
    March 10, 2006).                                                                                                 
|        | 10 | .19*+ |  |  |  | Form of Restricted Stock Unit Agreement (Performance-Based) for
    Employees under the Hydril 2000 Incentive Plan (incorporated by
    reference to Exhibit 10.1 of the Companys
    Form 10-Q for the quarter ended June 30, 2005).
|        | 10 | .20*+ |  |  |  | Hydril Company 2005 Incentive Plan (incorporated by reference to
    Annex A to our Definitive Proxy Statement on
    Schedule 14A filed with the Commission on April 8,
    2005).                                                   
|        | 10 | .21*+ |  |  |  | Form of Deferred Share Unit Award Agreement between Hydril and
    Non-employee Directors (incorporated by reference to
    Exhibit 10.2 of the Companys Form 8-K filed with
    the Commission on May 23, 2005).                    
|        | 10 | .22*+ |  |  |  | Form of Change in Control Renewal Agreement for Executive
    Officers (through December 31, 2006) (incorporated by
    reference to Exhibit 10.1 of the Companys
    Form 8-K filed with the Commission on March 10, 2006).         
|        | 21 | .1    |  |  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                       
|        | 23 | .1    |  |  |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                             
|        | 24 | .1    |  |  |  | Powers of Attorney.                                                                                                                                                                                                                   
|        | 31 | .1    |  |  |  | Certification by Christopher T. Seaver, Chief Executive Officer,
    pursuant to Rule 13a-14(a) of the Securities Exchange Act
    of 1934.                                                                                           
|        | 31 | .2    |  |  |  | Certification by Chris D. North, Chief Financial Officer,
    pursuant to Rule 13a-14(a) of the Securities Exchange Act
    of 1934.                                                                                                  
|        | 32 | .1    |  |  |  | Certification by Christopher T. Seaver, Chief Executive Officer,
    pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002  (Subsection (a) and (b) of Section 1350,
    Chapter 63 of Title 18, United States Code).         
|        | 32 | .2    |  |  |  | Certification by Chris D. North, Chief Financial Officer,
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    (Subsection (a) and (b) of Section 1350,
    Chapter 63 of Title 18, United States Code).                 






|  |  |                                                   
|- |  | --------------------------------------------------
|* |  | Incorporated by reference as indicated.           
| 
|+ |  | Denotes management compensatory plan or agreement.