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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



(Mark One)



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2003



OR



| ̈ |  | 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 ofincorporation or organization) |  | (IRS EmployerIdentification No.)
|                                                              | 
|3300 North Sam Houston Parkway East Houston, Texas            |  | 77032-3411                      
|(Address of principal executive offices)                      |  | (Zip Code)                      



Registrants telephone number, including area code (281) 449-2000



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes x        No ̈



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



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

Shares outstanding at November 6, 2003:

Common stock, $.50 par value, 16,049,192 shares outstanding

Class B common stock, $.50 par value, 6,757,721 shares outstanding



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HYDRIL COMPANY



INDEX



PART IFINANCIAL
INFORMATION



|                                                                                                                |  | Page
|--------------------------------------------------------------------------------------------------------------- |  | ----
|Item 1. Financial Statements                                                                                    |  |     
|                                                                                                                | 
|Consolidated Balance SheetsSeptember 30, 2003 (unaudited) and December 31, 2002                                |  | 4   
|Unaudited Consolidated Statements of OperationsFor the Three and Nine Months Ended September 30, 2003 and 2002 |  | 6   
|Unaudited Consolidated Statements of Cash FlowsFor the Nine Months Ended September 30, 2003 and 2002           |  | 7   
|Notes to Unaudited Consolidated Financial Statements                                                            |  | 8   
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                   |  | 17  
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                              |  | 35  
|Item 4. Controls and Procedures                                                                                 |  | 35  
|                                                                                                                | 
|PART IIOTHER INFORMATION                                                                                       |  |     
|                                                                                                                | 
|Item 6. Exhibits and Reports on Form 8-K                                                                        |  | 36  



* * *



Cautionary Statement Regarding Forward-Looking Information



This quarterly report on Form 10-Q 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 and assumptions, which are
more fully described under RISK FACTORS in Item 2 of this report and in Hydril Companys Annual Report on Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission, include, but are not limited
to, 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 impact of geo-political and other events affecting international
markets and trade, Hydrils ability to remain on the leading edge of technology in its products and maintain and increase its market share, the impact of international and domestic trade laws, the loss of or change to distribution methods of
premium connections in the U.S. and Canada, overcapacity in the pressure control industry, and high fixed costs that could affect the pricing of Hydrils products. 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.





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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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HYDRIL COMPANY

Part I, Item 1: Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Information)



|                                                                        |  | September 30,2003 |          |   | December 31,2002 |  
|----------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | -
|                                                                        |  | (unaudited)       |          |   |                  |  
|CURRENT ASSETS:                                                         |  |                   |          |   |                  |  
|Cash and cash equivalents                                               |  | $                 | 43,333   |   |                  | $
|Investments                                                             |  |                   | 10,426   |   |                  |  
|Receivables:                                                            |  |                   |          |   |                  |  
|Trade, less allowance for doubtful accounts: 2003, $1,210; 2002, $1,039 |  |                   | 35,008   |   |                  |  
|Contract costs and estimated earnings in excess of billings             |  |                   | 3,143    |   |                  |  
|Other                                                                   |  |                   | 1,849    |   |                  |  
|                                                                        |  |                   |          |   |                  |  
|Total receivables                                                       |  |                   | 40,000   |   |                  |  
|                                                                        |  |                   |          |   |                  |  
|Inventories:                                                            |  |                   |          |   |                  |  
|Finished goods                                                          |  |                   | 21,708   |   |                  |  
|Work-in-process                                                         |  |                   | 10,098   |   |                  |  
|Raw Materials                                                           |  |                   | 6,185    |   |                  |  
|                                                                        |  |                   |          |   |                  |  
|Total inventories                                                       |  |                   | 37,991   |   |                  |  
|                                                                        |  |                   |          |   |                  |  
|Deferred tax asset                                                      |  |                   | 11,398   |   |                  |  
|Other current assets                                                    |  |                   | 2,584    |   |                  |  
|                                                                        |  |                   |          |   |                  |  
|Total current assets                                                    |  |                   | 145,732  |   |                  |  
|                                                                        |  |                   |          |   |                  |  
|                                                                        |  |                  
|PROPERTY:                                                               |  |                   |          |   |                  |  
|Land and improvements                                                   |  |                   | 20,431   |   |                  |  
|Buildings and equipment                                                 |  |                   | 52,109   |   |                  |  
|Machinery and equipment                                                 |  |                   | 162,144  |   |                  |  
|Construction-in-progress                                                |  |                   | 2,154    |   |                  |  
|                                                                        |  |                   |          |   |                  |  
|Total                                                                   |  |                   | 236,838  |   |                  |  
|Less accumulated depreciation and amortization                          |  |                   | (131,969 | ) |                  |  
|                                                                        |  |                   |          |   |                  |  
|Property, net                                                           |  |                   | 104,869  |   |                  |  
|                                                                        |  |                   |          |   |                  |  
|                                                                        |  |                  
|OTHER LONG-TERM ASSETS:                                                 |  |                   |          |   |                  |  
|Investments                                                             |  |                   | 964      |   |                  |  
|Other assets                                                            |  |                   | 6,036    |   |                  |  
|                                                                        |  |                   |          |   |                  |  
|TOTAL                                                                   |  | $                 | 257,601  |   |                  | $
|                                                                        |  |                   |          |   |                  |  



See notes to unaudited
consolidated financial statements



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HYDRIL COMPANY

Part I, Item 1: Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Information)



|                                                                                                                                                                                      |  | September 30,2003 |         |   | December, 31,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|                                                                                                                                                                                      |  | (unaudited)       |         |   |                   |  
|CURRENT LIABILITIES:                                                                                                                                                                  |  |                   |         |   |                   |  
|Accounts payable                                                                                                                                                                      |  | $                 | 13,007  |   |                   | $
|Billings in excess of contract costs and estimated earnings                                                                                                                           |  |                   | 325     |   |                   |  
|Accrued liabilities                                                                                                                                                                   |  |                   | 16,885  |   |                   |  
|Current portion of long-term debt                                                                                                                                                     |  |                   |        |   |                   |  
|Income taxes payable                                                                                                                                                                  |  |                   | 3,548   |   |                   |  
|                                                                                                                                                                                      |  |                   |         |   |                   |  
|Total current liabilities                                                                                                                                                             |  |                   | 33,765  |   |                   |  
|                                                                                                                                                                                      |  |                   |         |   |                   |  
|                                                                                                                                                                                      |  |                  
|LONG-TERM LIABILITIES:                                                                                                                                                                |  |                   |         |   |                   |  
|Deferred tax liability                                                                                                                                                                |  |                   | 158     |   |                   |  
|Other                                                                                                                                                                                 |  |                   | 13,100  |   |                   |  
|                                                                                                                                                                                      |  |                   |         |   |                   |  
|Total long-term liabilities                                                                                                                                                           |  |                   | 13,258  |   |                   |  
|                                                                                                                                                                                      |  |                   |         |   |                   |  
|                                                                                                                                                                                      |  |                  
|CONTINGENCIES (Note 4)                                                                                                                                                                |  |                   |         |   |                   |  
|                                                                                                                                                                                      |  |                  
|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; 16,026,692 and 15,369,638 shares issued and outstanding at September
30, 2003 and December 31, 2002, respectively        |  |                   | 8,013   |   |                   |  
|Class B common stock-authorized, 32,000,000 shares of $.50 par value; 6,757,721 and 7,192,427 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively |  |                   | 3,379   |   |                   |  
|Additional paid in capital                                                                                                                                                            |  |                   | 48,802  |   |                   |  
|Retained earnings                                                                                                                                                                     |  |                   | 154,833 |   |                   |  
|Deferred compensation-restricted stock/units                                                                                                                                          |  |                   | (1,926  | ) |                   |  
|Accumulated other comprehensive loss                                                                                                                                                  |  |                   | (2,523  | ) |                   |  
|                                                                                                                                                                                      |  |                   |         |   |                   |  
|Total stockholders equity                                                                                                                                                            |  |                   | 210,578 |   |                   |  
|                                                                                                                                                                                      |  |                   |         |   |                   |  
|TOTAL                                                                                                                                                                                 |  | $                 | 257,601 |   |                   | $
|                                                                                                                                                                                      |  |                   |         |   |                   |  



See notes to unaudited
consolidated financial statements



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HYDRIL COMPANY

Part I, Item 1: Unaudited Consolidated Statements of Operations

(In Thousands, Except Share and Per Share
Amounts)



|                                            |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | -
|                                            |  | 2003                            |            |   | 2002                           |  
|REVENUE                                     |  | $                               | 50,243     |   |                                | $
|COST OF SALES                               |  |                                 | 31,444     |   |                                |  
|                                            |  |                                 |            |   |                                |  
|GROSS PROFIT                                |  |                                 | 18,799     |   |                                |  
|                                            |  |                                 |            |   |                                |  
|SELLING, GENERAL & ADMINISTRATION EXPENSES: |  |                                 |            |   |                                |  
|Engineering                                 |  |                                 | 3,434      |   |                                |  
|Sales and marketing                         |  |                                 | 4,239      |   |                                |  
|General and administration                  |  |                                 | 4,959      |   |                                |  
|                                            |  |                                 |            |   |                                |  
|Total                                       |  |                                 | 12,632     |   |                                |  
|                                            |  |                                 |            |   |                                |  
|OPERATING INCOME                            |  |                                 | 6,167      |   |                                |  
|                                            |  |                                 |            |  
|INTEREST EXPENSE                            |  |                                 |           |   |                                |  
|INTEREST INCOME                             |  |                                 | 126        |   |                                |  
|OTHER INCOME (EXPENSE)                      |  |                                 | (106       | ) |                                |  
|                                            |  |                                 |            |   |                                |  
|INCOME BEFORE INCOME TAXES                  |  |                                 | 6,187      |   |                                |  
|PROVISION (BENEFIT) FOR INCOME TAXES        |  |                                 | (1,539     | ) |                                |  
|                                            |  |                                 |            |   |                                |  
|NET INCOME                                  |  | $                               | 7,726      |   |                                | $
|                                            |  |                                 |            |   |                                |  
|NET INCOME PER SHARE:                       |  |                                 |            |   |                                |  
|BASIC                                       |  | $                               | 0.34       |   |                                | $
|                                            |  |                                 |            |   |                                |  
|DILUTED                                     |  | $                               | 0.34       |   |                                | $
|                                            |  |                                 |            |   |                                |  
|WEIGHTED AVERAGE SHARES OUTSTANDING:        |  |                                 |            |   |                                |  
|BASIC                                       |  |                                 | 22,765,373 |   |                                |  
|DILUTED                                     |  |                                 | 23,043,844 |   |                                |  



See notes to unaudited
consolidated financial statements



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HYDRIL COMPANY

Part I, Item 1: Unaudited Consolidated Statements of Cash Flows

(In Thousands)



|                                                                              |  | Nine Months Ended September 30 |        
|----------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                              |  | 2003                           |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                         |  |                                |        
|Net income                                                                    |  | $                              | 20,352 
|                                                                              |  |                                |        
|Adjustments to reconcile net income to net cash used in operating activities: |  |                                |        
|Amortization of deferred compensation                                         |  |                                | 140    
|Depreciation                                                                  |  |                                | 8,802  
|Deferred income taxes                                                         |  |                                | (2,138 
|Provision for doubtful accounts                                               |  |                                | 226    
|Gain on sale of real estate not used in operations                            |  |                                | (104   
|Change in operating assets and liabilities:                                   |  |                                |        
|Receivables                                                                   |  |                                | (1,294 
|Contract costs and estimated earnings in excess of billings                   |  |                                | 1,686  
|Inventories                                                                   |  |                                | 3,493  
|Other current and noncurrent assets                                           |  |                                | 691    
|Accounts payable                                                              |  |                                | (716   
|Billings in excess of contract costs and estimated earnings                   |  |                                | (4,656 
|Accrued liabilities                                                           |  |                                | (4,771 
|Income taxes payable                                                          |  |                                | (215   
|Other long-term liabilities                                                   |  |                                | (3,270 
|                                                                              |  |                                |        
|Net cash provided by operating activities                                     |  |                                | 18,226 
|                                                                              |  |                                |        
|NET CASH FROM INVESTING ACTIVITIES:                                           |  |                                |        
|Purchase of held-to-maturity investments                                      |  |                                | (18,157
|Proceeds from held-to-maturity investments                                    |  |                                | 16,331 
|Capital expenditures                                                          |  |                                | (5,358 
|Other, net                                                                    |  |                                | (1,097 
|                                                                              |  |                                |        
|Net cash used in investing activities                                         |  |                                | (8,281 
|NET CASH FROM FINANCING ACTIVITIES:                                           |  |                                |        
|Repayment of debt                                                             |  |                                | (30,000
|Repayment of capital leases                                                   |  |                                |       
|Net proceeds from issuance of common stock                                    |  |                                | 229    
|Net proceeds from exercise of stock options                                   |  |                                | 1,569  
|                                                                              |  |                                |        
|Net cash used in financing activities                                         |  |                                | (28,202
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                     |  |                                | (18,257
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                              |  |                                | 61,590 
|                                                                              |  |                                |        
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                    |  | $                              | 43,333 
|                                                                              |  |                                |        
|                                                                              |  |                               
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                             |  |                                |        
|Interest paid                                                                 |  | $                              | 1,041  
|Income taxes paid:                                                            |  |                                |        
|Domestic                                                                      |  |                                |       
|Foreign                                                                       |  |                                | 6,326  



See notes to unaudited
consolidated financial statements



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Hydril Company



Part I, Item 1: Notes to Unaudited Consolidated Financial Statements



Note 1  BASIS OF PRESENTATION



Principles of ConsolidationThe consolidated financial statements include the accounts of Hydril Company and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated in
consolidation.



Use of EstimatesThe preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.



ReclassificationsCertain prior year amounts within the
consolidated financial statements have been reclassified to conform to the current years presentation.



Interim PresentationThe accompanying consolidated interim financial statements and disclosures have been prepared by the Company in
accordance with accounting principles generally accepted in the United States of America and in the opinion of management reflect all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation in all material
respects of the financial position and results for the interim periods. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for
the year ended December 31, 2002. The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of results to be expected for the full year.



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Note 2  Product Warranty Liability



The changes in the aggregate product warranty liability is as follows for the three and nine months ended September 30:



|                                       |  | Three Months EndedSeptember 30, |       |   | Nine Months Ended September 30, |  
|-------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------- | -
|(in thousands)                         |  | 2003                            |       |   | 2002                            |  
|Beginning balance                      |  | $                               | 2,204 |   |                                 | $
|Claims paid                            |  |                                 | (363  | ) |                                 |  
|Additional warranty charged to expense |  |                                 | 519   |   |                                 |  
|                                       |  |                                 |       |   |                                 |  
|Ending balance                         |  | $                               | 2,360 |   |                                 | $
|                                       |  |                                 |       |   |                                 |  



Note 3  LONG-TERM CONTRACTS



The components of long-term contracts as of September 30,
2003 and December 31, 2002 consist of the following:



|                                                                          |  | September 30,2003 |         |   | December 31,2002 |  
|------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | -
|                                                                          |  | (in thousands)    |        
|Costs and estimated earnings on uncompleted contracts                     |  | $                 | 28,331  |   |                  | $
|Less: billings to date                                                    |  |                   | (25,513 | ) |                  |  
|                                                                          |  |                   |         |   |                  |  
|Excess of costs and estimated earnings over billings                      |  | $                 | 2,818   |   |                  | $
|                                                                          |  |                   |         |   |                  |  
|Included in the accompanying balance sheets under the following captions: |  |                   |         |   |                  |  
|Contract costs and estimated earnings in excess of billings               |  | $                 | 3,143   |   |                  | $
|Billings in excess of contract costs and estimated earnings               |  |                   | (325    | ) |                  |  
|                                                                          |  |                   |         |   |                  |  
|Total                                                                     |  | $                 | 2,818   |   |                  | $
|                                                                          |  |                   |         |   |                  |  



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Note 4  CONTINGENCIES



The Company is involved in legal proceedings arising in the ordinary course of business. In the opinion of management these
matters are such that their outcome will not have a material adverse effect on the financial position or results of operations of the Company.



The Company has been identified as a potentially responsible party at a waste disposal site near Houston, Texas. Based on the number of other potentially
responsible parties, the total estimated site cleanup costs and its estimated share of such costs, the Company does not expect this matter to materially affect its results of operation or financial condition.



Note 5  LONG TERM DEBT



The Companys borrowings as of September 30, 2003 and December 31, 2002
were as follows:



|                     |  | September 30,2003 |   | December 31,2002 |  
|-------------------- |  | ----------------- | - | ---------------- | -
|                     |  | (in thousands)    |  
|Senior notes         |  | $                 |  |                  | $
|Less current portion |  |                   |  |                  |  
|                     |  |                   |   |                  |  
|Total long-term debt |  | $                 |  |                  | $
|                     |  |                   |   |                  |  



At September 30, 2003,
the Company had available $20,000,000 in committed unsecured revolving lines of credit. Of this, $15,000,000 relates to the Companys U.S. operations and $5,000,000 relates to the Companys foreign operations. Under the domestic line, the
Company may, at its election, borrow at either a prime or LIBOR based interest rate. Interest rates under the line fluctuate depending on the Companys leverage ratio and are prime minus a spread ranging from 60 to 115 basis points or LIBOR
plus a spread ranging from 85 to 140 basis points. At September 30, 2003, there were no outstanding borrowings under this credit facility. There are covenants under this line which require the Company to maintain certain financial ratios. The
Company was in compliance with these covenants at September 30, 2003.



Additionally, under the foreign line of credit the Company may, at its election, borrow at either a prime or LIBOR based interest rate. Interest rates under the credit line fluctuate depending on the Companys leverage ratio and are
prime minus a spread ranging from 60 to 115 basis points or LIBOR plus a spread ranging from 85 to 140 basis points. At September 30, 2003, there were no outstanding borrowings under this facility. The foreign line does not contain any separate
financial covenants but contains cross-default provisions which would be triggered by a default under the U.S. line of credit.



The terms of the Companys credit facilities allows for the issuance of letters of credit. The amount of outstanding letters of credit reduces the
amount available for



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borrowing under the credit facilities. The letters of credit are generally short in duration and immaterial in amount. At September 30, 2003 there was
approximately $324,000 outstanding in letters of credit.



Note 6 
INCOME TAXES



During the quarter ended September 30, 2003,
the company completed a research and experimentation tax study which resulted in a $3,705,000 credit to the Companys income tax provision. The research and experimentation tax credit covers qualified spending for the ten-year period from 1992
through 2001. Prior to 2003, the Company was an alternative minimum tax payer and accordingly could not benefit from this type of tax credit. Expenses associated with the study of $442,000 are included in general and administrative expenses for the
quarter.



Note 7  EARNINGS PER SHARE



The Company has presented basic and diluted income per share
(EPS) on the consolidated statement of operations. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive EPS
is based on the weighted average number of shares outstanding during each period plus the assumed exercise of dilutive stock options and vesting of restricted stock and restricted stock units, less the number of treasury shares from the proceeds
using the average market price for the Companys common stock for each of the periods presented. When potentially dilutive securities are anti-dilutive, they are not included in dilutive EPS. Basic weighted average shares outstanding for the
three months ended September 30, 2003 and 2002 were 22,765,373 and 22,423,891, respectively, while for the nine months ended September 30, 2003 and 2002 were 22,680,760 and 22,381,720, respectively. Dilutive weighted average shares outstanding for
the three months ended September 30, 2003 and 2002 were 23,043,744 and 22,910,796, respectively, while for the nine months ended September 30, 2003 and 2002 were 22,985,192 and 22,834,778, respectively.



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Note 8  EMPLOYEE STOCK OPTION PLANS



The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized for the Companys stock option plans. In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) 148 Accounting for Stock-Based Compensation-Transition and Disclosure. The statement requires pro forma disclosures that reflect the difference in stock-based employee
compensation cost, if any, included in net income and the total cost measured by the fair value based method per SFAS 123 Accounting for Stock-Based Compensation, if any, that would have been recognized in the income statement if the
fair value based method had been applied to all awards.



The
following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 for the three and nine months ended September 30, 2003 and 2002:



|(in thousands except per share data)                                                                                            |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | -
|                                                                                                                                |  | 2003                            |       |   | 2002                           |  
|Net income, as reported                                                                                                         |  | $                               | 7,726 |   |                                | $
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of
tax |  |                                 | (539  | ) |                                |  
|                                                                                                                                |  |                                 |       |   |                                |  
|Proforma net income                                                                                                             |  | $                               | 7,187 |   |                                | $
|                                                                                                                                |  |                                 |       |   |                                |  
|Earnings per share:                                                                                                             |  |                                 |       |   |                                |  
|Basicas reported                                                                                                               |  | $                               | 0.34  |   |                                | $
|Basicproforma                                                                                                                  |  | $                               | 0.32  |   |                                | $
|                                                                                                                                |  |                                 |       |  
|Dilutedas reported                                                                                                             |  | $                               | 0.34  |   |                                | $
|Dilutedproforma                                                                                                                |  | $                               | 0.31  |   |                                | $



Note 9  SEGMENT AND RELATED
INFORMATION



In accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information, the Company has identified the following reportable segments: Premium Connection and Pressure Control.



The Companys premium connection segment manufactures premium
connections that are used in drilling environments where extreme pressure, temperature, corrosion and mechanical stress are encountered, as well as in environmentally sensitive drilling. These harsh drilling conditions are typical for deepwater,
deep-formation and horizontal wells.



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Hydril applies premium threaded connections to tubulars owned by its customers and purchases pipe in certain international markets for threading and resale.
Hydril manufactures premium threaded connections and provides services at facilities located in Houston, Texas; Westwego, Louisiana; Bakersfield, California; Nisku, Alberta, and Dartmouth, Nova Scotia, Canada; Aberdeen, Scotland; Veracruz, Mexico;
Batam, Indonesia; and Port Harcourt and Warri, Nigeria.



The
Companys pressure control segment manufactures a broad range of pressure control equipment used in oil and gas drilling and well completion typically employed in harsh environments. The Companys pressure control products are primarily
safety devices that control and contain fluid and gas pressure during drilling, completion and maintenance in oil and gas wells. The Company also provides aftermarket replacement parts, repair and field services for its installed base of pressure
control equipment. Hydril manufactures pressure control products at two plant locations in Houston, Texas.



The accounting policies of the segments are the same as those described in Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES under Item 8 of
our Annual Report on Form 10-K for the year-ended December 31, 2002 filed with the Securities and Exchange Commission. The Company evaluates performance based on operating income or loss.



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Financial data for the business segments for the three and nine months ended September 30, 2003 and 2002
is as follows:



|(in thousands)           |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | -
|                         |  | 2003                            |        |   | 2002                           |  
|Revenue                  |  |                                 |        |   |                                |  
|Premium Connection       |  | $                               | 24,836 |   |                                | $
|Pressure Control         |  |                                 | 25,407 |   |                                |  
|                         |  |                                 |        |   |                                |  
|Total                    |  | $                               | 50,243 |   |                                | $
|                         |  |                                 |        |   |                                |  
|Operating income (loss)  |  |                                 |        |   |                                |  
|Premium Connection       |  | $                               | 5,444  |   |                                | $
|Pressure Control         |  |                                 | 4,471  |   |                                |  
|Corporate Administration |  |                                 | (3,748 | ) |                                |  
|                         |  |                                 |        |   |                                |  
|Total                    |  | $                               | 6,167  |   |                                | $
|                         |  |                                 |        |   |                                |  
|Depreciation expense     |  |                                 |        |   |                                |  
|Premium Connection       |  | $                               | 1,853  |   |                                | $
|Pressure Control         |  |                                 | 695    |   |                                |  
|Corporate Administration |  |                                 | 440    |   |                                |  
|                         |  |                                 |        |   |                                |  
|Total                    |  | $                               | 2,988  |   |                                | $
|                         |  |                                 |        |   |                                |  
|Capital expenditures     |  |                                 |        |   |                                |  
|Premium Connection       |  | $                               | 924    |   |                                | $
|Pressure Control         |  |                                 | 355    |   |                                |  
|Corporate Administration |  |                                 | 164    |   |                                |  
|                         |  |                                 |        |   |                                |  
|Total                    |  | $                               | 1,443  |   |                                | $
|                         |  |                                 |        |   |                                |  



Note 10  RECENT ACCOUNTING
PRONOUNCEMENTS



On May 15, 2003, the Financial Accounting
Standards Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The statement requires that an issuer classify financial instruments that are
within its scope as a liability. Many of those instruments were classified as equity under previous guidance. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise
effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS 150 effective July 1, 2003, which had no material impact on the results of operations or financial condition.



On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133.
This statement is effective for contracts entered into or modified after June 30, 2003. The Company adopted SFAS 149



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effective July 1, 2003, which had no material impact on the results of operations or financial condition.



In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123. This statement provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation and amends APB Opinion No. 28, Interim Financial Reporting to require disclosure of those effects in interim financial information. Additionally, the statement requires new disclosures about the effect
of stock-based employee compensation on reported results and specifies the form, content, and location of those disclosures. This statement is effective for fiscal years ending after December 15, 2002. The Company has adopted the disclosure only
provisions of SFAS 148 and continues to account for stock-based compensation using the intrinsic value method prescribed in APB 25. See Note 8 for additional information.



In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. The interpretation addresses disclosures
to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The disclosure requirements in the interpretation are effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company adopted FASB Interpretation No. 45 effective January 1, 2003, which had no material impact on the results of operations or financial condition.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Previous accounting guidance was provided by EITF Issue No.
94-3. Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 replaces Issue 94-3 and is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company adopted SFAS 146 effective January 1, 2003, which had no material impact on the results of operations or financial condition.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The rescission of SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and SFAS No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements, will affect income statement classification of gains and losses from extinguishment of debt. SFAS No. 4 required that gains and losses from extinguishment of debt be classified as an extraordinary item, if
material. Under SFAS No. 145, extinguishment of debt is now considered a risk management strategy by the reporting enterprise and the FASB does not believe it should be considered extraordinary under the criteria in APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and



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Transactions, unless the debt extinguishment meets the unusual in nature and infrequency of occurrence criteria in APB Opinion No. 30. SFAS
No. 145 will be effective for fiscal years beginning after May 15, 2002. The Companys early adoption of SFAS 145, effective July 1, 2002, had no material impact on the results of operations or financial condition.



In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived
asset. Subsequently, the asset retirement costs should be allocated to expense using a systematic and rational method. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company adopted SFAS 143 effective January 1, 2003,
which had no material impact on the results of operations or financial condition.



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Part I, Item 2:    Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion of Hydrils historical results of operations and financial condition should be read in conjunction with Hydrils
unaudited consolidated financial statements and notes thereto included elsewhere in this report and the audited consolidated financial statements and notes thereto included in Hydrils Annual Report on Form 10-K for the year ended December 31,
2002.



OVERVIEW



Hydril Company is engaged worldwide in engineering, manufacturing and
marketing premium connection and pressure control products used for oil and gas drilling and production. Our premium connections are used in drilling environments where extreme pressure, temperature, corrosion and mechanical stress are encountered,
as well as in environmentally sensitive drilling. These harsh drilling conditions are typical for deep-formation, deepwater and horizontal wells. Our pressure control products are primarily safety devices that control and contain fluid and gas
pressure during drilling, completion and maintenance of oil and gas wells. We also provide aftermarket replacement parts, repair and field services for our installed base of pressure control equipment. These products and services are required on a
recurring basis because of the impact of the extreme conditions in which pressure control products are used.



Demand for our products and services is cyclical and substantially dependent on the activity levels in the oil and gas industry and our customers
willingness to spend capital on the exploration and development of oil and gas reserves. The level of these capital expenditures is highly sensitive to current and expected oil and gas prices, which have historically been characterized by
significant volatility. Our premium connection products are marketed primarily to exploration and production company operators. In North America, our premium connection business is driven principally by the number of rigs drilling to target depths
greater than 15,000 feet and by the number of rigs drilling in water depths greater than 1,500 feet. Internationally, while the total international rig count is a general indicator of the premium connection market, there are many variables,
including political and civil unrest, which may adversely impact the level of drilling activity in only particular countries or regions. If we are affected by conditions that exist in only specific markets, our premium connections results may differ
relative to movements in the international rig count.



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We sell our pressure control products primarily to drilling contractors for use in oil and gas drilling
and to a lesser extent to exploration and production companies for equipment use in production. The main factors that affect sales of pressure control capital equipment products are the level of construction of new drilling rigs and the rate at
which existing rigs are refurbished. Demand for our pressure control aftermarket replacement parts, repair and field services primarily depends upon the level of worldwide offshore drilling activity as well as the total U.S. rig count. The following
tables illustrate the data for these sectors over the last five quarters:



|AverageU.S. Rig CountOver 15,000 ft Target Depth (1) |  | AverageGulf of Mexico Rig CountOver 1,500 ft Water Depth (2)
|---------------------------------------------------- |  | ------------------------------------------------------------
|QuarterEnded                                         |  | Numberof Rigs                                               
|09/30/02                                             |  | 134                                                         
|12/31/02                                             |  | 119                                                         
|03/31/03                                             |  | 126                                                         
|06/30/03                                             |  | 131                                                         
|09/30/03                                             |  | 153                                                         



|AverageWorldwide OffshoreRig Count (3) |  | AverageU.S. TotalRig Count (4)
|-------------------------------------- |  | ------------------------------
|QuarterEnded                           |  | Numberof Rigs                 
|09/30/02                               |  | 342                           
|12/31/02                               |  | 344                           
|03/31/03                               |  | 324                           
|06/30/03                               |  | 343                           
|09/30/03                               |  | 339                           



| | (1) |  | Source: Average rig count calculated by Hydril using weekly data published by Smith International.
| | --- |  | --------------------------------------------------------------------------------------------------



| | (2) |  | Source: Average rig count calculated by Hydril using month-end data provided by ODS-Petrodata Group.
| | --- |  | ----------------------------------------------------------------------------------------------------



| | (3) |  | 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 therefore excludes the Former Soviet Union and China.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) |  | Source: Average rig count calculated by Hydril using weekly data published by Baker Hughes Incorporated.
| | --- |  | --------------------------------------------------------------------------------------------------------



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002



Revenue



Total revenue decreased $11.9 million, or 19%, to $50.2 million for the three months ended September 30, 2003 compared to
$62.1 million for the three months ended September 30, 2002. Our premium connection revenue decreased $8.0 million, or 24%, to $24.8 million for the three months ended September 30, 2003 compared to $32.8 million for



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the prior year period. This decrease was primarily the result of lower demand in key international markets in the Eastern Hemisphere due in part to political
and civil uncertainties in certain markets. In addition, our North American market experienced a decline in revenue, despite increasing levels of rigs drilling to target depths greater than 15,000 feet. This decline resulted from our
distributors consumption of inventories during the quarter without placing orders to restock, which we believe is due to their uncertainty over future natural gas storage levels and future natural gas prices. Pressure control revenue decreased
$3.9 million, or 13%, to $25.4 million for the three months ended September 30, 2003 compared to $29.3 million for the same period in 2002. Capital equipment revenue decreased 31% primarily due to a lower level of projects in backlog as several
projects were completed and new purchase orders were at only modest levels, consistent with the low level of new rig construction and refurbishment in the industry generally. This decrease was partially offset by an 8% increase in aftermarket
pressure control revenue due to an increase in the total U.S. total rig count and consumption of spare parts in the drilling process.



Gross Profit



Gross profit decreased $4.8 million to $18.8 million for the three months ended September 30, 2003 from $23.6 million for the three months ended September
30, 2002. The decrease was primarily due to lower sales volumes in both our segments.



Selling, General and Administrative Expenses



Selling, general, and administrative expenses for the third quarter of 2003 were $12.6 million compared to $11.1 million for the prior year period. This increase was primarily due to tax consulting fees related to the research and
experimentation income tax credit (see Provision (Benefit) for Income Taxes below for details), net additions to the bad debt allowance, and higher legal and engineering expenses. As a percentage of sales, selling, general, and
administrative expenses were 25% for the third quarter of 2003 compared to 18% for the third quarter of 2002.



Operating Income



Operating income decreased $6.3 million to $6.2 million for the three months ended September 30, 2003 compared to $12.5 million for the same period in 2002. Operating income for our premium connection segment decreased $4.5 million to $5.4
million for the third quarter of 2003 from $9.9 million for the third quarter of 2002. Operating income for our pressure control segment decreased $0.9 million to $4.5 million for the quarter ended September 30, 2003 compared to the same period in
2002. Corporate and administrative expenses were $3.7 million for the three months ended September 30, 2003 compared to $2.8 million for the prior year period.



Interest Expense



There was no interest expense for the three months ended September 30, 2003 due to the payoff of our outstanding debt in the second quarter of 2003,
compared to $2.0 million for the prior year period.



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Provision (Benefit) for Income Taxes



We recognized a net income tax benefit of $1.5 million for the three months ended September 30, 2003, compared to income tax
expense of $3.8 million for the three months ended September 30, 2002. This is primarily the result of a research and experimentation tax credit of $3.7 million that we recorded during the third quarter of 2003. This credit covers qualified spending
for the ten-year period from 1992 through 2001. Prior to 2003, Hydril was an alternative minimum tax payer and could not benefit from this type of tax credit.



RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

AND 2002



Revenue



Total revenue decreased $22.1 million, or 12%, to $162.1 million for the
nine months ended September 30, 2003 compared to $184.2 million for the nine months ended September 30, 2002. Our premium connection revenue decreased $12.1 million, or 13%, to $84.3 million for the nine months ended September 30, 2003 compared to
$96.4 million for the prior year period. This decrease is primarily the result of lower demand in key international markets in the Eastern Hemisphere due in part to political and civil uncertainties in certain markets. Pressure control revenue
decreased $10.0 million, or 11%, to $77.8 million for the nine months ended September 30, 2003 compared to $87.8 million for the same period in 2002. Pressure control capital equipment revenue decreased 27% due to a lower level of projects in
backlog, consistent with the low level of new rig construction and refurbishment in the industry generally. This decrease was partially offset by a 9% increase in aftermarket pressure control revenue due in part to an increase in the total U.S.
total rig count and consumption of spare parts in the drilling process.



Gross Profit



Gross profit decreased $5.6
million, or 8%, from $68.3 million for the nine months ended September 30, 2002 to $62.7 million for the nine months ended September 30, 2003. This decline was not as significant as the revenue decline because lower sales volumes were partially
offset by a product mix shift in our pressure control segment from lower-margin capital equipment to higher-margin aftermarket replacement parts.



Selling, General and Administrative Expenses



Selling, general, and administrative expenses for the nine months ended September 30, 2003 were $36.5 million compared to $34.3 million for the prior year
period. The increase was due to higher engineering expenses primarily related to research and development activities and customer product testing, tax consulting fees related to the research and experimentation income tax credit, and net additions
to the bad debt allowance. As a percentage of sales, selling, general, and administrative expenses were 23% for the nine months ended September 2003 compared to 19% for the same period in 2002.



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Operating Income



Operating income decreased $7.9 million to $26.2 million for the nine months ended September 30, 2003 compared to $34.1 million for the same period in
2002. Operating income for our premium connection segment decreased $6.5 million to $20.9 million for the nine months ended September 30, 2003 from $27.4 million for the same period in 2002. Operating income for our pressure control segment
decreased $0.2 million to $15.5 million for the nine months ended September 30, 2003 compared to the same period in 2002. Corporate and administrative expenses increased $1.3 million to $10.2 million for the nine months ended September 30, 2003
compared to the prior year period.



Interest Expense



Interest expense for the nine months ended September 30, 2003 was $1.1
million compared to $4.3 million for the prior year period. The reduction in interest expense was due to lower outstanding debt compared to the prior year period as well as the payoff of our remaining debt in the second quarter of 2003.



Provision (Benefit) for Income Taxes



The Provision for income taxes for the nine months ended September 30, 2003
was $5.3 million compared to $10.9 million for the same period in 2002. The decrease is primarily the result of a research and experimentation tax credit of $3.7 million that we recorded during the third quarter of 2003. This credit covers qualified
spending for the ten-year period from 1992 through 2001. Prior to 2003, the Company was an alternative minimum tax payer and could not benefit from this type of tax credit.



LIQUIDITY AND CAPITAL RESOURCES



Our primary liquidity needs are to fund capital expenditures, fund new product development and provide additional working
capital. Our primary source of funds is cash flow from operations. In addition, we have available $20 million in committed revolving credit facilities.



Operating Activities



For the nine months ended September 30, 2003, cash provided by operating activities was $18.2 million primarily due to earnings and contractual cash
payments received from customers on long-term capital equipment projects, which was partially offset by higher working capital requirements and a $7.0 million contribution to the U.S. defined benefit pension plan. Cash provided by operating
activities was $21.0 million for the nine months ended September 30, 2002 primarily due to earnings, contractual cash payments received from customers for progress made on capital equipment long-term projects and utilization of deferred income tax
assets, the effects of which were partially offset by higher working capital requirements.



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Investing Activities



Net cash used in investing activities was $8.3 million for the nine months ended September 30, 2003 compared to $15.2 million for the nine months ended
September 30, 2002. Capital spending for the nine months ended September 30, 2003 of $5.4 million included $2.0 million for our pressure control segment and $2.7 million for our premium connection segment, in both cases primarily to support
manufacturing operations, and $0.7 million for general corporate purposes. Capital spending for the nine months ended September 30, 2002 included $8.0 million in our premium connection segment related to plant capacity expansion and $6.3 million in
our pressure control segment to replace and refurbish machine tools as well as to construct a new deepwater assembly building for blowout preventer stack assembly at our Houston plant. Capital spending for the remainder of 2003 is expected to be
approximately $3-4 million.



Credit Facilities



We have two unsecured revolving lines of credit for working capital
requirements that provide up to $20.0 million in total committed revolving credit borrowings through June 30, 2005. Of these, $15.0 million relates to our U.S. operations and $5.0 million relates to our foreign operations. Under these lines, we may
borrow, at our election, at either a prime or LIBOR based interest rate. Interest rates fluctuate depending on our leverage ratio and are prime minus a spread ranging from 60 to 115 basis points or LIBOR plus a spread ranging from 85 to 140 basis
points. At September 30, 2003, there were no outstanding borrowings under either facility. Our U.S. revolving credit agreement contains covenants with respect to debt levels, tangible net worth and debt-to-capitalization ratios. At September 30,
2003, we were in compliance with these covenants. Our foreign line of credit does not contain any separate financial covenants but contains cross-default provisions which would be triggered by a default under our U.S. line of credit.



The terms of the Companys credit facilities allows for the issuance of
letters of credit. The amount of outstanding letters of credit reduces the amount available for borrowing under the credit facilities. The letters of credit are generally short in duration and immaterial in amount. At September 30, 2003 there was
approximately $0.3 million outstanding in letters of credit.



Backlog



The pressure control capital equipment backlog was $17.0
million at September 30, 2003, $32.5 million at December 31, 2002 and $40.5 million at September 30, 2002. The decrease from September 30, 2002 was the result of work completed and revenue recognized on several large long-term capital equipment
project orders with no new substantial project orders. Substantially all of the remaining revenue from projects currently in backlog is expected to be recorded during the fourth quarter of 2003 and first quarter of 2004. We recognize the revenue and
gross profit from pressure control long-term projects using the percentage-of-completion accounting method. As revenue is recognized under the percentage-of-completion method, the order value in backlog is reduced. It is possible for orders to be
cancelled; however, in the event of cancellations all costs incurred would be



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billable to the customer. Our backlog of premium connection and pressure control aftermarket parts and service is not a meaningful measure of business
prospects due to the quick turnover of such orders.



CRITICAL ACCOUNTING POLICIES



Our accounting
policies are described in Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES under Item 8 of our Annual Report on Form 10-K for the year-ended December 31, 2002 filed with the Securities and Exchange Commission. We prepare our
consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the year. Actual results could differ from those estimates. We consider the following policies to be most critical in
understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.



Revenue Recognition



Revenue for all products and services is recognized at the time such products are delivered or services are performed, except as described below.



Revenue from long-term contracts, which are generally
contracts from six to eighteen months and an estimated contract price in excess of $1.0 million, is recognized using the percentage-of-completion method measured by the percentage of cost incurred to estimated final cost. Contract costs include all
direct material, labor and subcontract costs and those indirect costs related to contract performance. If a long-term contract were anticipated to have an estimated loss, such loss would be recognized in the period in which the loss became apparent.
It is possible but not contemplated that estimates of contract costs could be revised significantly higher in the near term as a result of unforeseen engineering and manufacturing changes.



Inventories



Inventories are stated at the lower of cost or market. Inventory costs include material, labor and production overhead. Cost
is determined by the last-in, first-out method for substantially all pressure control products (approximately 85% and 81% of total gross inventories at December 31, 2002 and 2001, respectively) and by the first-in, first-out method for all other
inventories.



The Company periodically reviews its inventory
for excess or obsolete items and provides a reserve for the difference in the carrying value of excess or obsolete items and their estimated net realizable value.



Product warranties



The Company sells certain of its products to customers with a product warranty that provides that customers can return a defective product during a
specified warranty period



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following the purchase in exchange for a replacement product or for repair at no cost to the customer or the issuance of a credit to the customer. The
Company accrues its estimated exposure for product warranties based on known warranty claims as well as current and historical warranty costs incurred.



Contingencies



Contingencies are accounted for in accordance with the FASBs SFAS No. 5, Accounting for Contingencies. SFAS No. 5 requires that we
record an estimated loss from a loss contingency when information available prior to the issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as environmental, legal, and income tax matters requires us to use our judgment. While we believe that our accruals for these matters are adequate,
if the actual loss from a contingency is significantly different than the estimated loss, our results of operations may be adjusted in the period in which the actual loss is realized.



RISK FACTORS



You should consider carefully the following risk factors and all other information contained in this quarterly report on Form 10-Q and our Annual Report
on Form 10-K for the year-ended December 31, 2002. Any of the following risks could impair our business, financial condition and operating results.



Risks Relating to Our Business



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.



Demand for our products and services
is substantially dependent on the level of capital expenditures by the oil and gas industry for the exploration for and development of crude oil and natural gas reserves. In particular, demand for our premium connections and our aftermarket pressure
control products and services is driven by the level of worldwide drilling activity, especially drilling in harsh environments. A substantial or extended decline in drilling activity will adversely affect the demand for our products and services.
Demand for our pressure control capital equipment is directly affected by the number of drilling rigs being built or refurbished. At this time, drilling rig utilization for many categories of rigs is below capacity. Therefore, in general, drilling
contractors are not planning significant refurbishment of drilling rigs or new rig construction. As a result of these conditions, we do not expect to receive any significant new capital equipment orders for at least the next several months. An
extended decline in capital equipment orders could adversely affect revenue and operating income for our pressure control segment and could result in additional charges if we are required to take cost reduction measures in light of business
conditions. Worldwide drilling activity is generally highly sensitive to oil and gas prices and can be dependent on the industrys view of future oil and gas prices, which have



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been historically characterized by significant volatility. Oil and gas prices are affected by numerous factors, including:



| |  |  | 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 Iraq, Venezuela and Nigeria;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------



| |  |  | policies of national governments; and
| | - |  | -------------------------------------



| |  |  | war, civil disturbances and political instability.
| | - |  | --------------------------------------------------



We expect prices for oil and natural gas to continue to be volatile and affect the demand and pricing of our products and services. A material decline in
oil or gas prices could materially adversely affect our business. In addition, recessions and other adverse economic conditions can also cause declines in spending levels by the oil and gas industry, and thereby decrease our revenue and materially
adversely affect our business.



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.



There are a limited number of distributors who buy steel tubulars, contract
with us to thread the tubulars and sell completed tubulars with our premium connections. In 2002, our nine distributors accounted for 63% of our premium connection sales in the United States and Canada.



In the United States, tubular distributors have combined on a rapid basis in
recent years resulting in fewer distribution alternatives for our products. In 1999, four distributors, one of which distributed our premium connections, combined to become one of the largest distributors of tubulars in the United States, and the
combined company no longer distributes our products. Because of the limited number of distributors, we have few alternatives if we lose a distributor. Identifying and utilizing additional or replacement distributors may not be accomplished quickly
and could involve significant additional costs. Even if we find replacement distributors, the terms of new distribution agreements may not



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be favorable to us. In addition, distributors may not be as well capitalized as our end-users and may present a higher credit risk.



We cannot assure you that the current distribution system for premium
connections will continue. For example, products may in the future be sold directly by tubular manufacturers to end-users or through other distribution channels such as the internet. If methods of distribution change, many of our competitors may be
better positioned to take advantage of those changes than we are.



The intense competition in our industry could result in reduced profitability and loss of market share for us.



Contracts for our products and services are generally awarded on a competitive basis, and competition is intense. The most important factors considered by
our customers in awarding contracts include:



| |  |  | availability and capabilities of the equipment;
| | - |  | -----------------------------------------------



| |  |  | ability to meet the customers delivery schedule;
| | - |  | -------------------------------------------------



| |  |  | price;
| | - |  | ------



| |  |  | reputation;
| | - |  | -----------



| |  |  | experience;
| | - |  | -----------



| |  |  | safety record, and
| | - |  | ------------------



| |  |  | technology.
| | - |  | -----------



Many of our major competitors are diversified multinational companies that are larger and have substantially greater financial resources, larger operating staffs and greater budgets for marketing and research and
development than we do. They may be better able to compete in making equipment available faster and more efficiently, meeting delivery schedules or reducing prices. In addition, two or more of our major competitors could consolidate producing an
even larger company. Also our competitors may acquire product lines that would allow them to offer a more complete package of drilling equipment and services rather than providing only individual components. As a result of any of the foregoing
reasons, we could lose customers and market share to those competitors. These companies may also be better able than we are to successfully endure downturns in the oil and gas industry.



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.



The level of
imports of tubular goods, which has varied significantly over time, affects the domestic tubular goods market. High levels of imports reduce the volume sold by domestic producers and tend to reduce their selling prices, both of which could have an
adverse impact on our business. We believe that United States import levels are affected by, among other things:



| |  |  | United States and worldwide demand for tubular goods;
| | - |  | -----------------------------------------------------



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| |  |  | the trade practices of and government subsidies to foreign producers; and
| | - |  | -------------------------------------------------------------------------



| |  |  | the presence or absence of antidumping and countervailing duty orders.
| | - |  | ----------------------------------------------------------------------



In many cases, foreign producers of tubular goods have been found to have sold their products, which may include premium connections, for export to the
United States at prices that are lower than the cost of production or their prices in their home market or a major third-country market, a practice commonly referred to as dumping. If not constrained by antidumping duty orders and
countervailing duty orders, which impose duties on imported tubulars to offset dumping and subsidies provided by foreign governments, this practice allows foreign producers to capture sales and market share from domestic producers. Duty orders
normally reduce the level of imported goods and result in higher prices in the United States market. Duty orders may be modified or revoked as a result of administrative reviews conducted at the request of a foreign producer or other party.



In addition, antidumping and countervailing duty orders may be
revoked as a result of periodic sunset reviews. Under the sunset review procedure, an order must be revoked after five years unless the United States Department of Commerce and the International Trade Commission determine that dumping is
likely to continue or recur and that material injury to the domestic injury is likely to continue or recur. Antidumping duty orders continue to cover imports of tubulars from Argentina, Italy, Japan, Korea and Mexico, and a countervailing duty order
continues to cover imports from Italy. On July 17, 2001, the Department of Commerce ordered the continuation of the countervailing and antidumping duty orders on tubular goods other than drill pipe on Argentina, Italy, Korea and Mexico, and the
continuation of the antidumping duty order on tubular goods, inclusive of drill pipe, from Japan. If the orders covering imports from these countries are revoked in full or in part or the duty rates lowered, we could be exposed to increased
competition from imports that could reduce our sales and market share or force us to lower prices. Tubulars produced by domestic steel mills and threaded by us may not be able to economically compete with tubulars manufactured and threaded at steel
mills outside the U.S. The Department of Commerce intends to initiate the next five-year review of these orders no later that June 2006. The sunset review for tubular products from Argentina, Italy, Japan, Korea and Mexico will take place in 2006,
with a decision expected by April 2007.



We may lose premium
connection business to international and domestic competitors who produce their own pipe, as well as other new entrants.



In the United States and Canada and sometimes internationally, our premium connections are added to steel tubulars purchased by a distributor from
third-party steel suppliers. After our premium connections are added, the distributor sells the completed premium tubular to a customer at a price that includes, but does not differentiate between, the costs of the steel pipe and the connection.
Pricing of premium connections can be affected by steel prices, as the steel pipe is the largest component of the overall price. We have no control over the price of the steel pipe that is supplied for our connections.



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During 2002, we derived approximately 69% of our revenue from services or equipment ultimately provided
or delivered to end-users for use outside of the United States. Many of our larger competitors, especially internationally, are integrated steel producers, who produce, rather than purchase, steel. For example, several foreign steel mills have
formed a corporation that is licensed to produce and sell a competing premium connections product line outside of the United States and Canada. Foreign integrated steel producers have more pricing flexibility for premium connections since they
control the production of both the steel tubulars to which the connections are applied, as well as the premium connections. This inherent pricing and supply control puts us at a competitive disadvantage, and we could lose business to integrated
steel producers even if we may have a better product. The recent acquisition or future acquisitions of U.S. tubular steel manufacturing capacity by foreign integrated steel producers could result in a loss of market share for Hydril. Other domestic
and foreign steel producers who do not currently manufacture tubulars with premium connections may in the future enter the premium connections business and compete with us.



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



In 2002, approximately 69% of our total revenue was
derived from services or equipment ultimately provided or delivered to end-users outside the United States, and approximately 30% of our revenue was derived from products which were produced and used outside of the United States. We are, therefore,
significantly exposed to the risks customarily attendant to international operations and investments in foreign countries. These risks include:



| |  |  | 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.
| | - |  | ----------------------------



An interruption of our international operations could reduce our earnings or adversely affect the value of our foreign assets. The occurrence of any of
these risks could also have an adverse effect on demand for our products and services or our ability to provide them. We have manufacturing facilities in Warri and Port Harcourt, Nigeria and in Batam, Indonesia and a portion of our revenue is from
sales to customers in these countries and surrounding areas. In addition, a portion of our revenue is from sales to customers in Venezuela. These countries in recent history have experienced civil disturbances and



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violence, which have disrupted oil and gas exploration and production operations located there. These disruptions have resulted in lower demand for our
premium connection products and services and, accordingly have had an adverse affect on our results of operations in recent periods and may continue to do so.



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.



The occurrence or
threat of future terrorist attacks could adversely affect the economies of the United States and other developed countries. A lower level of economic activity could result in a decline in energy consumption, which could cause a decrease in spending
by oil and gas companies for exploration and development. In addition, these risks could trigger increased volatility in prices for crude oil and natural gas which could also adversely affect spending by oil and gas companies. A decrease in spending
for any reason could adversely affect the markets for our products and thereby adversely affect our revenue and margins and limit our future growth prospects. Moreover, these risks could cause increased instability in the financial and insurance
markets and adversely affect our ability to access capital and to obtain insurance coverage that we consider adequate or are otherwise required by our contracts with third parties.



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



Exploration and production company
operators and drilling contractors have undergone substantial consolidation in the last few years. Additional consolidation is probable.



Consolidation results in fewer end-users for our products. In addition, merger activity among both major and independent oil and gas companies also
affects exploration, development and production activity, as these consolidated companies attempt to increase efficiency and reduce costs. Generally, only the more promising exploration and development projects from each merged entity are likely to
be pursued, which may result in overall lower post-merger exploration and development budgets.



In 2002, our largest premium connection customer accounted for 19% of segment sales, and our ten largest premium connection customers accounted for 64% of total segment sales. In 2002, our two largest pressure control
customers accounted for 26% and 18% of segment sales and our ten largest pressure control customers accounted for 70% of segment sales.



The loss of one or more of our end-users or a reduction in exploration and development budgets as a result of industry consolidation or other reasons
could adversely affect demand for our products and services and reduce our revenue.



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



There currently is and historically has been overcapacity in the pressure control equipment industry. When oil and gas prices fall, cash flows of our customers are reduced, leading to lower levels of expenditures and
reduced demand for pressure control equipment. In addition, adverse economic conditions can reduce demand for oil and gas, which in turn could decrease demand for our pressure control products. Under these conditions, the overcapacity causes
increased price competition in the sale of pressure control products and aftermarket services as competitors seek to capture the reduced business to cover their high fixed costs and avoid the idling of manufacturing facilities. Because we have
multiple facilities that produce different types of pressure control products, it is even more difficult for us to reduce our fixed costs since to do so we might have to shut down more than one plant. During and after periods of increasing oil and
gas prices when sales of pressure control products may be increasing, the overcapacity in the industry will tend to keep prices for the sale of pressure control products lower than if overcapacity were not a factor. As a result, when oil and gas
prices are low, or are increasing from low levels because of increased demand, our business and revenue may be adversely affected because of either reduced sales volume or sales at lower prices or both.



If we do not develop, produce and commercialize new competitive
technologies and products, our revenue may decline.



The
markets for premium connections and pressure control products and services are characterized by continual technological developments. As a result, substantial improvements in the scope and quality of product function and performance can occur over a
short period of time. If we are not able to develop commercially competitive products in a timely manner in response to changes in technology, our business and revenue may be adversely affected. Our future ability to develop new products depends on
our ability to:



| |  |  | design and commercially produce products that meet the needs of our customers;
| | - |  | ------------------------------------------------------------------------------



| |  |  | successfully market new products; and
| | - |  | -------------------------------------



| |  |  | obtain and maintain patent protection.
| | - |  | --------------------------------------



We may encounter resource constraints or technical or other difficulties that could delay introduction of new products and services in the future. Our
competitors may introduce new products before we do and achieve a competitive advantage.



Additionally, the time and expense invested in product development may not result in commercial applications and provide revenue. We have invested significant amounts in the development of new technologies, such as
advanced composite tubing and subsea mudlift drilling. We could be required to write off our entire investment in a new product that does not reach commercial viability. Moreover, we may experience operating losses after new products are introduced
and commercialized because of high start-up costs, unexpected manufacturing costs or problems, or lack of demand.



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If we are not successful in developing and commercializing subsea mudlift drilling technology or other
new technologies, our growth prospects may be reduced or we may be required to write-off any capitalized investment.



We were the technical leader, designer and equipment manufacturer for a joint industry project working with a number of exploration and production company
operators, drilling contractors and an integrated oil service provider to develop a subsea mudlift drilling technology. If successful, the technology would enable exploration and production company operators to economically drill for and produce oil
and gas in ultra-deepwater in excess of 5,000 feet. In October 2001, the joint industry project completed its final phase by successfully drilling a test well in the Gulf of Mexico. Hydril is now in the process of refining the design of the
equipment and pursuing commercialization of this technology. However, there are other groups of companies in our industry that are also developing competing technologies for deepwater drilling, and they may be ahead of us in completing development
of their technology. If one or more of these groups develops a commercially viable technology before we do, they may gain a significant competitive advantage over us.



In addition, the cost to implement the technology may be high and there may be little demand for the completed technology.
We are devoting significant resources to the development of subsea mudlift drilling technology.



If we are unable to successfully develop and commercialize subsea mudlift drilling, commercialize our advanced composite tubing, or successfully implement
other technological or R&D type activities, our growth prospects may be reduced and the level of our future revenue may be materially and adversely affected. In addition, if we are unsuccessful, we could be required to write-off any capitalized
investment in a product that does not reach commercial viability.



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



Some of our products and the processes we use to produce them have been granted United States and international patent protection, or have patent
applications pending. Nevertheless, patents may not be granted from our applications and, if patents are issued, the claims allowed may not be sufficient to protect our technology. If our patents are not enforceable, our business may be adversely
affected. In addition, if any of our products infringe patents held by others, our financial results may be adversely affected. Our competitors may be able to independently develop technology that is similar to ours without infringing on our
patents. The latter is especially true internationally where the protection of intellectual property rights may not be as effective. In addition, obtaining and maintaining intellectual property protection internationally may be significantly more
expensive than doing so domestically. We may have to spend substantial time and money defending our patents. After our patents expire, our competitors will not be legally constrained from developing products substantially similar to ours.



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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 success depends heavily on the
continued services of our senior management and other key employees. Our senior management consists of a small number of individuals relative to other comparable or larger companies. These individuals are Christopher T. Seaver, our President and
Chief Executive Officer, Charles E. Jones, our Executive Vice President and Chief Operating Officer, Neil G. Russell, our Senior Vice President-Premium Connections and Senior Vice President-Business Development, Chuck Chauviere-Vice
President-Pressure Control, and Michael C. Kearney, Chief Financial Officer and Vice President-Administration. These individuals, as well as other key employees, possess sales and marketing, engineering, manufacturing, financial and administrative
skills that are critical to the operation of our business.We generally do not have employment or non-competition agreements with members of our senior management or other key employees. If we lose or suffer an extended interruption in
the services of one or more of our senior officers or other key employees, our results of operations may be adversely affected. Moreover, we may not be able to attract and retain qualified personnel to succeed members of our senior management and
other key employees.



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



Our ability to operate profitably and expand our operations depends in part on our ability to attract and retain skilled manufacturing workers, equipment
operators, engineers and other technical personnel. Because of the cyclical nature of our industry, many qualified workers choose to work in other industries where they believe lay-offs as a result of cyclical downturns are less likely. As a result,
our growth may be limited by the scarcity of skilled labor. Even if we are able to attract and retain employees, the intense competition for them, especially when our industry is in the top of its cycle, may increase our compensation costs.
Additionally, a significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the rates of wages we must pay or both. If our compensation costs increase or we cannot attract and
retain skilled labor, the immediate effect on us would be a reduction in our profits and the extended effect would be diminishment of our production capacity and profitability and impairment of any growth potential.



We may lose money on fixed price contracts, and such contracts could cause
our quarterly revenue and earnings to fluctuate significantly.



Almost all of our pressure control projects, including all of our larger engineered subsea control systems projects, are performed on a fixed-price basis. This means that we are responsible for all cost overruns, other than any resulting
from change orders. Our costs and any gross profit realized on our fixed-price contracts will often vary from the estimated amounts on which these contracts were originally based. This may occur for various reasons, including:



| |  |  | errors in cost, design or production time estimates;
| | - |  | ----------------------------------------------------



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| |  |  | engineering design changes;
| | - |  | ---------------------------



| |  |  | changes requested by customers; and
| | - |  | -----------------------------------



| |  |  | changes in the availability and cost of labor and material.
| | - |  | -----------------------------------------------------------



The variations and the risks inherent in engineered subsea control systems projects may result in reduced profitability or losses on our projects.
Depending on the size of a project, variations from estimated contract performance can have a significant impact on our operating results for any particular fiscal quarter or year. Our significant losses in 1997 through 1999 on fixed-price contracts
to provide pressure control equipment and subsea control systems for pressure control equipment are an example of the problems we can experience with fixed-price contracts.



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



Fluctuations in quarterly revenue and earnings could adversely affect the
trading price of our common stock. Our quarterly revenue and earnings may vary significantly from quarter to quarter depending upon:



| |  |  | the level of drilling activity worldwide;
| | - |  | -----------------------------------------



| |  |  | 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 and;
| | - |  | -----------------------------------------------------------



| |  |  | weather conditions that can affect our customers operations.
| | - |  | -------------------------------------------------------------



Revenue derived from current or future pressure control long-term projects is expected to be realized over periods of two to six quarters. As a result,
our revenue and earnings could fluctuate significantly from quarter to quarter if there is any delay in completing these projects or if revenue is recognized sooner than expected. In addition, our fixed costs cause our margins to decrease when
demand is low and manufacturing capacity is underutilized.



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



Most of our products are used in hazardous drilling and production applications where an accident or a failure of a product can have catastrophic
consequences. For example, if one of our blowout preventers fails, the oil and gases from the well may ignite or the equipment and tubulars in the well may be suddenly propelled out of the well, potentially resulting in injury or death of personnel,
destruction of drilling equipment, environmental damage and suspension of operations. Damages arising from an occurrence at a location where our products are used have in the past and may in the future result in the assertion of potentially large
claims against us.



While we maintain insurance coverage
against these risks, this insurance may not protect us against liability for some kinds of events, including specified events involving pollution, or against losses resulting from business interruption. Our insurance may not be adequate in risk
coverage or policy limits to cover all losses or liabilities that we may incur.



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Moreover, we may not be able in the future to maintain insurance at levels of risk coverage or policy limits that we deem adequate. Any significant claims
made under our policies will likely cause our premiums to increase. Any future damages caused by our products or services that are not covered by insurance, are in excess of policy limits or are subject to substantial deductibles, could reduce our
earnings and our cash available for operations.



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



Our business is affected by changes in public policy, federal, state and local laws and regulations relating to the energy industry. The adoption of laws
and regulations curtailing exploration and development drilling for oil and gas for economic, environmental and other policy reasons may adversely affect our operations by limiting available drilling and other opportunities in the oil and gas
exploration and production industry. Our operations and properties are subject to increasingly stringent laws and regulations relating to environmental protection, including laws and regulations governing air emissions, water discharges, waste
management and workplace safety. Many of our operations require permits that may be revoked or modified, that we are required to renew from time to time. Failure to comply with such laws, regulations or permits can result in substantial fines and
criminal sanctions, or require us to purchase costly pollution control equipment or implement operational changes or improvements. We incur, and expect to continue to incur, substantial capital and operating costs to comply with environmental laws
and regulations.



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



We use and generate hazardous substances and wastes in our manufacturing operations. In addition, many of our current and former properties are or have
been used for industrial purposes for many years. Accordingly, we could become subject to potentially material liabilities relating to the investigation and cleanup of contaminated properties, including property owned or leased by us now or in the
past or third party sites to which we sent waste for disposal. We also could become subject to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. In addition, stricter enforcement
of existing laws and regulations, the enactment of new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis of new or increased
liabilities that could reduce our earnings and our cash available for operations. See Note 11 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002 for more information
regarding environmental contingencies.



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



We provide warranties as to the proper operation and conformance to specifications of the equipment we manufacture. Our pressure control equipment and premium



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connections are often deployed in critical environments including subsea applications. Failure of this equipment or our premium connections to operate
properly or to meet specifications may increase our costs by requiring additional engineering resources and services, replacement of parts and equipment or monetary reimbursement to a customer. We have in the past received warranty claims and we
expect to continue to receive them in the future. To the extent that we incur substantial warranty claims in any period, our reputation, our ability to obtain future business and our earnings could be materially and adversely affected.



Our revolving credit facility contains covenants that limit our
operating and financial flexibility.



Under the terms of
our revolving credit facility, we must maintain minimum levels of tangible net worth, not exceed levels of debt specified in the agreement, and not exceed a maximum leverage ratio. A breach could permit the lenders to accelerate the debt so that it
is immediately due and payable. In that event, no further borrowings would be available under the revolving credit facility. Our ability to meet the financial ratios and tests under our revolving credit facility can be affected by events beyond our
control, and we may not be able to satisfy those ratios and tests.



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



We invest excess cash in various securities and money market mutual funds rated as the highest quality by a nationally recognized rating agency. However,
changes in the financial markets, including interest rates, as well as the performance of the issuing companies can affect the market value of our short-term investments.



Part I, Item 3:    Quantitative and Qualitative Disclosures About Market Risk



There have been no significant changes since December 31, 2002 in the Companys exposure to market risk.



Part I, Item 4:    Controls and Procedures



Hydrils Chief Executive Officer and Chief Financial Officer have evaluated the Companys disclosure controls and procedures as of September 30, 2003, and they concluded that these controls and procedures
are effective. There were no changes in the Companys internal control over financial reporting that occurred during the Companys last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.



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Part II, Item 6:    Exhibits and Reports on Form 8-K



Exhibits:



|     | 
|---- | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 
|     | 
|32.2 | 



Reports on Form 8-K:



On July 29, 2003, we filed a report on Form 8-K furnishing pursuant to Items
9 and 12 the news release issued by Hydril Company dated July 28, 2003. Pursuant to Item 7, we attached the news release as an exhibit to the report.



On September 19, 2003, we filed a report on Form 8-K furnishing pursuant to Item 9 the news release issued by Hydril Company dated September 18, 2003.
Pursuant to Item 7, we attached the news release as an exhibit to the report.



SIGNATURE



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |  |  |     |  | HYDRIL COMPANY           
|----------------------- |  |  |  | --- |  | -------------------------
|                        |  |  | 
|Date: November 13, 2003 |  |  |  | By: |  | /s/    Michael C. Kearney
|                        |  |  |  |     |  |                          



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