##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2003

Commission file number 000-31579

Hydril Company

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                      
|------------------------------------------------------------------ |  | -------------------------------------
|Delaware                                                           |  | 95-2777268                           
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS Employer
    Identification 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


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

Title of each class


Common Stock, par value $.50 per
share


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 þ          No o

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

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

Aggregate market value of common stock and
class B common stock held by nonaffiliates of the
registrant as of June 30, 2003: $440,005,868. The
class B common stock is not publicly traded. For purposes
of the foregoing determination, the value of each share of
class B common stock was assumed to be equal to the value
of a share of common stock.

Number of shares outstanding of each of the
registrants classes of common stock, as of March 5,
2004:

Common stock outstanding: 16,131,187 shares


Class B common stock outstanding:
6,726,578 shares


Documents incorporated by reference: Portions of
Part III hereof are incorporated by reference from the
Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2003 in
connection with the Registrants 2004 Annual Meeting of
Stockholders.



---






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HYDRIL COMPANY

FORM 10-K

For the Year Ended December 31,
2003


INDEX

|                                            |  |                                                                                           |    |      |    | 
|------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                            |  |                                                                                           |    | Page
|                                            |  |                                                                                           |    |     
|PART I                                     
|Item 1.                                     |  | Business                                                                                  |    |      | 3  | 
|Item 2.                                     |  | Properties                                                                                |    |      | 13 | 
|Item 3.                                     |  | Legal Proceedings                                                                         |    |      | 14 | 
|Item 4.                                     |  | Submission of Matters to a
    Vote of Security Holders                                   |    |      | 14 | 
|Item S-K 401(b)                             |  | Executive Officers of the
    Registrant                                                  |    |      | 14 | 
|PART II                                    
|Item 5.                                     |  | Market for Registrants
    Common Equity and Related Stockholder Matters                 |    |      | 15 | 
|Item 6.                                     |  | Selected Financial Data                                                                   |    |      | 16 | 
|Item 7.                                     |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |    |      | 17 | 
|Item 7A.                                    |  | Quantitative and Qualitative
    Disclosures About Market Risk                            |    |      | 35 | 
|Item 8.                                     |  | Financial Statements and
    Supplementary Data                                           |    |      | 36 | 
|Item 9.                                     |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |    |      | 64 | 
|Item 9A.                                    |  | Controls and Procedures                                                                   |    |      | 64 | 
|PART III                                   
|Item 10.                                    |  | Directors and Executive
    Officers of the Registrant                                    |    |      | 64 | 
|Item 11.                                    |  | Executive Compensation                                                                    |    |      | 64 | 
|Item 12.                                    |  | Security Ownership of
    Certain Beneficial Owners and Management                        |    |      | 64 | 
|Item 13.                                    |  | Certain Relationships and
    Related Transactions                                        |    |      | 65 | 
|Item 14.                                    |  | Principal Accounting Fees
    and Services                                                |    |      | 65 | 
|PART IV                                    
|Item 15.                                    |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |    |      | 65 | 
|Signatures                                  |  |                                                                                           | 67 |     
|Amendment to 2000 Incentive Plan           
|Subsidiaries of the Registrant             
|Consent of Deloitte & Touche LLP           
|Powers of Attorney                         
|Certification by Christopher T. Seaver, CEO
|Certification by Michael C. Kearney, CFO   
|Certification by Christopher T. Seaver, CEO
|Certification by Michael C. Kearney, CFO   



* * *

Cautionary Statement Regarding Forward-Looking
Information

This annual report contains forward-looking
statements. These statements relate to future events or our
future financial performance, including our business strategy
and product development plans, and involve known and unknown
risks and uncertainties. These risks and uncertainties include,
but are not limited to, 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.
Please read MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-RISK FACTORS
for more information about many of these risks and

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uncertainties. These factors may cause our
companys or our industrys actual results, levels of
activity, performance or achievements to be materially different
from those expressed or implied by the forward-looking
statements. In some cases, you can identify forward-looking
statements by terminology such as may,
will, should, could,
expects, intends, plans,
anticipated, believes,
estimated, potential, or the negative of
these terms or other comparable terminology.


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

2



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PART I




Item 1 Business

Hydril 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 or highly deviated
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 in the
same environments. 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 on original
equipment of the extreme conditions in which pressure control
products are used.

Hydril was founded in 1933 and reincorporated
under the laws of the state of Delaware in 1972. In October
2000, we completed an initial public offering. Our common stock
is traded on the Nasdaq National Market under the symbol
HYDL. Hydrils website address is
www.hydril.com. Hydrils Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and all amendments to those reports are available
free of charge through Hydrils website as soon as
reasonably practicable after those reports are electronically
filed with or furnished to the Securities and Exchange
Commission. Information contained on Hydrils website is
not incorporated into this Annual Report and does not constitute
a part of this Annual Report.

Overview of Our Industry

Demand for oilfield products, such as premium
connection and pressure control equipment, is cyclical in nature
and depends substantially on the condition of the oil and gas
industry and our customers willingness to invest capital
in oil and gas exploration and development. The level of these
capital expenditures is highly sensitive to existing oil and gas
prices as well as the oil and gas industrys view of such
prices in the future. Generally, increasing oil and gas prices,
usually referred to as commodity prices, result in
increased oil and gas exploration and production, which
translates into greater demand for oilfield products and
services. Conversely, falling commodity prices generally result
in reduced demand for oilfield products and services.
Historically, changes in budgets and activity levels by oil and
gas exploration and production companies have lagged significant
movements in commodity prices.

In recent years, the focus of drilling activity
has been shifting towards the less-explored deeper geological
formations and deepwater locations, which offer potentially
prolific reserves. Exploration and production company operators
have also increasingly relied on advanced drilling technologies
such as horizontal drilling to improve production and recovery
rates of oil and gas reservoirs. Demand for premium connection
and pressure control products is favorably impacted by these
trends. We believe that the level of drilling activity in the
harsh environments that require these products will continue to
grow as exploration and production company operators
increasingly target deeper geological formations, shift their
exploration offshore and apply horizontal and deviated drilling
techniques.

The number of rigs drilling at target depths
greater than 15,000 feet and the number of rigs drilling in
water depths greater than 1,500 feet generally drive sales
of premium connection products. 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 aftermarket
replacement parts, repair and field services is driven primarily
by the level of worldwide offshore drilling activity, as well as
the total U.S. rig count.

Commodity prices during 2003 were relatively
stable and were up from 2002. U.S. crude oil prices
increased 19% from the 2002 average and natural gas prices
increased 64% from the 2002 average. As a result of these
higher, more stable commodity prices, drilling activity in the
United States rose throughout the year. The U.S. rig count
ended 2003 at 1,126, which was 31% above the year-ended 2002.
The average U.S. deep

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formation rig count (rigs drilling to a target
depth greater than 15,000 feet) ended 2003 at 173, an
increase of 40% over the year-ended 2002. Internationally,
drilling activity overall also increased, although not to the
same extent as domestic levels. The international rig count
(rigs drilling outside of the United States and Canada) ended
2003 at 803, up 7% from the year-ended 2002. The worldwide
offshore rig count for the year-ended 2003 of 357 was up 9%
compared with the year-ended 2002.


Despite these stable commodity prices and rising
rig counts in the United States, there was lower demand for
premium connections in the United States market as a result of
distributors reducing inventory stocking levels and placing only
limited replenishment orders. In addition deep-formation and
deep-water drilling activity did not recover proportionately to
the overall rig count increase. Many of the rigs returning to
work in the United States and Canada during 2003 were for
shallow wells that do not require premium connection products.
However, the rising rig count during the year resulted in higher
demand for aftermarket parts and service for pressure control
products.

While the international rig count increased
overall in 2003, certain key oil and gas markets such as Nigeria
and Venezuela had lower rig counts which diminished revenue
opportunities. Political and civil uncertainties in these
markets dampened the level of spending by oil and gas companies
operating there.

Finally, demand for new rig construction and
refurbishment worldwide has not been strong since 1999. Spending
has curtailed significantly because of underutilized assets in
the drilling fleets of major drilling contractors. As a result
of this reduced spending, the level of purchased capital
equipment, such as pressure control products, has also
decreased. The rising rig counts during 2003, which reflects the
deployment of more assets, have increased rig utilization and
improved demand for aftermarket pressure control equipment and
services, but not to the level needed to generate new capital
equipment purchases.



| |                                   
| | ----------------------------------
| | Market for Premium
    Connections

Premium connections join sections of well casing,
production tubing and drill pipe used in various stages of
drilling and production. The premium connection market is driven
by the level of worldwide drilling activity, in particular by
the number of rigs drilling to a target depth greater than
15,000 feet and rigs drilling in water depths greater than
1,500 feet. The majority of such wells have been drilled in
North America. These depths require substantially more premium
connections than shallower wells. The following table shows the
average rig count for rigs drilling at target depths greater
than 15,000 feet in the United States and the average
deepwater (greater than 1,500 feet of water depth) rig
count for the Gulf of Mexico for each of the years 1999 through
2003:

|     |  |                           |     |                              |  |  |    | 
|---- |  | ------------------------- | --- | ---------------------------- |  |  | -- | 
|     |  |                           |     | Average Gulf of Mexico      
|     |  | Average United States Rig |     | Rig Count                   
|     |  | Count Over 15,000 ft(1)   |     | Over 1,500 ft Water Depth(2)
|     |  |                           |     |                             
|Year |  | Number of Rigs            |     | Number of Rigs              
|     |  |                           |     |                             
|1999 |  |                           | 92  |                              |  |  | 20 | 
|2000 |  |                           | 121 |                              |  |  | 23 | 
|2001 |  |                           | 161 |                              |  |  | 30 | 
|2002 |  |                           | 128 |                              |  |  | 26 | 
|2003 |  |                           | 143 |                              |  |  | 23 | 



---



|    |                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------
|(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.

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 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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The number of horizontal wells, which require
connections with enhanced mechanical characteristics drilled
both onshore and offshore around the world, also drives the
market for premium connections.

Premium connections are generally required for
drilling in environmentally sensitive areas. Oil and gas
companies operating in locations where environmental laws and
regulations require a particularly high degree of environmental
safety, such as California, Alaska, the United Kingdom, Norway
and Canada, might utilize premium connections due to their
superior sealing capability and reliability. As environmental
awareness increases worldwide, and as governments open for
exploration new environmentally sensitive areas, we believe
demand for premium connections in such areas will likely
continue to increase.



| |                                          
| | -----------------------------------------
| | Market for Pressure Control
    Equipment

Pressure control products include a broad
spectrum of equipment and parts required for outfitting new
drilling rigs and upgrading and maintaining existing rigs.

Demand for pressure control capital equipment
depends on the level of construction of new offshore drilling
rigs and the replacement and upgrading of equipment for existing
offshore drilling rigs. The rig equipment market experienced
strong growth during the last offshore rig construction up
cycle, driven by an upturn in drilling rig utilization, which
peaked in 1998. Since 1999, demand in the industry for new
capital equipment has not been as strong due to the low level of
rig construction and refurbishment worldwide.

As a result of the high level of wear and tear
during operation, pressure control equipment requires frequent
maintenance and repair (including replacement parts), and
technical support services. 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. Since 1999,
demand for our aftermarket replacement parts and services has
increased as a result of an overall increase in the
U.S. rig count. The following tables show the average
worldwide offshore rig count and the average U.S. rig count
for each of the years 1999 through 2003:

|     |  |                    |     |                     |  |  |       | 
|---- |  | ------------------ | --- | ------------------- |  |  | ----- | 
|     |  | Average            |     | Average            
|     |  | Worldwide Offshore |     | United States Total
|     |  | Rig Count(1)       |     | Rig Count(2)       
|     |  |                    |     |                    
|Year |  | Number of Rigs     |     | Number of Rigs     
|     |  |                    |     |                    
|1999 |  |                    | 291 |                     |  |  | 625   | 
|2000 |  |                    | 331 |                     |  |  | 918   | 
|2001 |  |                    | 378 |                     |  |  | 1,156 | 
|2002 |  |                    | 344 |                     |  |  | 830   | 
|2003 |  |                    | 338 |                     |  |  | 1,032 | 



---



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

Business Segments



| |                                    
| | -----------------------------------
| | Our Premium Connection
    Business

We manufacture and market premium connections for
casing, production tubing and drill pipe. We also provide
technical solutions and field support services to address
specific customer needs in the design, selection and maintenance
of premium connections.

A conventional oil or gas well is drilled by
attaching a drill bit to the end of a series of sections of
drill pipe joined by threaded connections. Threaded connections
are similar to the grooves on a bolt and enable sections

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of drill pipe to be screwed together. Once
connected, the drill pipe may be up to several miles long,
commonly referred to as a drill string. The entire drill string
must be removed from the well numerous times during the drilling
process to replace dull drill bits and accomplish other tasks.
Removing the drill string requires the disassembly and
reassembly of the entire drill string. As a result, threaded
connections for drill pipe must be engineered to withstand
numerous assemblies without compromising the integrity of the
connections. When the well reaches sufficient depth during
drilling, the drill string is pulled out of the well and
sections of larger diameter pipe known as casing, also joined by
threaded connections, are inserted into the well and cemented in
place to prevent the well from collapsing. Drilling is resumed
until the next target depth is reached and the process is
repeated. Most wells use multiple concentric casing strings that
telescope or fit inside one another. The casing
diameter reduces as depth increases. Once the well has been
drilled to the desired depth and cased, production tubing is
placed inside the casing. The production tubing also consists of
multiple sections of pipe that are joined with threaded
connections. In a completed well, oil and natural gas pass up
through the production tubing to the top of the well.


Casing, production tubing, and drill pipe are the
types of oilfield tubulars for which we produce our premium
connections. The term premium refers to a product
produced by a precision manufacturing process with performance
characteristics superior to those of a standard industry
connection. Premium connections can withstand extreme conditions
encountered in deepwater offshore wells and deep gas wells, as
well as in horizontal well drilling. They also provide pressure
tight, highly reliable sealing necessary for environmentally
sensitive drilling. The technical complexity of these premium
connections requires a high degree of accuracy during
manufacturing and substantially more machining and inspection
time than standard connections.

We utilize computer controlled machines in our
premium connection manufacturing facilities worldwide. All of
our machine programs are created and maintained on a central
system in our technology center in Houston, Texas and
transmitted to each of our ten premium connection manufacturing
locations worldwide. As a result, all Hydril connections of a
particular type, regardless of manufacturing location, are
substantially identical, ensuring interchangeability.

To meet customer needs, we provide a full line of
premium connection products and accessories, including
connections for pipe of nonstandard size or weight. Our various
premium connection products exhibit various high performance
characteristics, such as:



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

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| |   |                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | connections and drill string. Our corrosion
    barrier ring, when used on plastic coated tubing connections,
    provides the entire tubing string with continuous internal
    protection from corrosive well bore fluids and also extends the
    useful life of the connections and tubing string.
|
| |  | Uniformity and
    compatibility.Our connections are
    manufactured worldwide with the same design, high tolerance
    specifications, and centrally manufactured tools and gauges,
    which enhances product uniformity and compatibility.                                                        

We offer our customers technical services related
to casing and tubing string design. Computer well design
software is utilized in the design and specification of the
tubulars and the thread connections. In addition, we offer
highly-trained field service technicians to assist our customers
worldwide. We have 30 licensed repair facilities worldwide to
support our premium connection business.

We also manufacture and market tubing that is
lightweight, flexible, resists corrosion and fatigue for use in
transporting oil and gas both out of the well and from the well
to storage facilities.



| |                              
| | -----------------------------
| | Our Pressure Control Business

We provide a broad range of pressure control
equipment used in oil and gas drilling and well completion and
maintenance. Our products regulate formation and drilling fluid
pressure during normal operations and prevent well blowouts when
the pressure of formation fluids and gases reaches critical
levels.

The oil, gas and water contained in the
geological formations into which a well is drilled can be under
extremely high pressure. This pressure increases with greater
water and drilling depth. When unanticipated formation pressure
is encountered, the pressure must be controlled to prevent an
uncontrolled release of the fluids and gases from the well,
known as a blowout. A blowout can have catastrophic
consequences, as the oil and natural gas 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 or environmental
damage. Blowouts can cause the loss of a well and significant
downtime and additional expense. During drilling and maintenance
operations, it is therefore essential to regulate the pressure,
and to provide for mechanical safeguards to minimize the effects.

Our pressure control products include blowout
preventers, diverters, subsea control systems, drill stem
valves, production chokes, pulsation dampeners and a variety of
specialized elastomer products. We also provide integrated
subsea control systems, which typically include a series of
blowout preventers stacked on top of one another, along with
other types of valves, and diverters. In addition, we provide
replacement parts, repair and field services to maintain our
installed base of products.



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

Blowout preventers.The key component of a pressure control system is a
high-pressure valve located at the top of the well called a
blowout preventer. When activated, blowout preventers seal the
well and prevent fluids and gases from escaping. Blowout
preventers are safety devices and are activated only if other
techniques for controlling pressure in the well are inadequate.

We manufacture two types of blowout preventers:



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

Diverters.Diverters
are safety devices used to redirect or vent the uncontrolled
flow of formation fluids and gases in a controlled manner during
offshore drilling operations. A diverter is used during drilling
when there is a danger of penetrating pressurized gas zones. Our
diverters incorporate a patented integral vent design that
reduces the need for peripheral devices normally required for
the use of diverters.

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Drill Stem Valves.Manually operated drill stem valves are placed in the drill
string to control well pressure in order to prevent blowouts and
drilling fluid spillage during the installation and removal of
drilling pipe. Our drill stem valves incorporate automatic
pressure balancing, which we were the first to develop, that
minimizes the torque required to operate them under pressure.

Pulsation Dampeners.Pulsation dampeners counterbalance the pulsing of pressure
fluids through pipelines that cause vibrations which may damage
pipework and valves. In addition to oilfield applications, our
pulsation dampeners are used in airport refueling systems and
chemical refinery and processing plants. Our pulsation dampeners
have a field replaceable bottom plate, which we were the first
to develop, that reduces the number of costly shop repairs.

Production Chokes.Production chokes are used to regulate the flow of oil, gas and
other formation fluids from producing wells which may have high
pressures, high flow rates or corrosive fluids. Our production
chokes use a proprietary nozzle configuration that reduces
internal erosion from produced sand and debris associated with
many oil and gas wells.

Elastomers.Our line
of rubber products includes parts used in annular and ram
blowout preventers, pulsation dampeners and other equipment. We
specialize in bonding rubber to metal and offer a wide variety
of elastomer products in a full range of sizes, pressure ratings
and elastomer types.

Integrated Systems.Our subsea systems integrate blowout preventers and other
pressure control products with control systems, usually for use
in deep, high-pressure wells drilled offshore. Our control
systems, also known as multiplex or MUX systems, use advanced
software, micro-electronics and materials technology and are
capable of operating in water depths up to 10,000 feet.
These MUX systems can be sold either as part of our integrated
system or sold separately to integrate with the customers
existing blowout prevention equipment.



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

Our aftermarket business is supported by our
growing installed base of pressure control products. Because our
products are subjected to harsh drilling conditions, they
frequently require repair and maintenance services, which
include replacement parts for those consumed during the drilling
operation. We manufacture metal replacement parts, including ram
blocks, pistons, cylinders, seal seats and valves. Elastomer
replacement parts manufactured and sold include packing units
for ram and annular blowout preventers and seal kits. We also
have a staff of field service personnel who assist customers on
site in the proper installation and use of our products.

We provide aftermarket services at our 6 domestic
and 10 international locations, and through 20 other authorized
repair facilities.



| |                                             
| | --------------------------------------------
| | Our Emphasis on Research and
    Development

We emphasize both the development of new products
and the continuous redesign and improvement of our existing
products. We consider ourselves to be a leader in the
development of new technology and equipment designed to enhance
the productivity and safety of the drilling and production
process in harsh drilling environments. 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.

Our current research and development efforts are
primarily focused on improvements in threaded connections,
enhancements to our blowout prevention and related equipment,
and products for use in conjunction with subsea mudlift
drilling. As of December 31, 2003, we employed 44 persons
on our engineering and design staffs, including mechanical,
electrical and software engineers, who were principally engaged
in product development and engineering research and development.

We believe that, in addition to the technical
competence and creativity of our employees, the success of our
business depends on intellectual property protection. As part of
our ongoing research, development and

8



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##### Table of Contents



manufacturing activities, we have a policy of
seeking patents, when appropriate, on inventions concerning new
equipment and product improvements. We hold numerous United
States and international patents and have numerous patent
applications pending. As we redesign and improve existing
products, we are often able to obtain extensions of patent lives
beyond their original duration. In addition, our trademarks are
registered in the United States and various foreign countries.
Our competitors may be able to independently develop technology
that is similar to ours without infringing on our patents, and
we may be unable to successfully protect our intellectual
property.


Although in the aggregate our patents and
trademarks are important to the manufacturing and marketing of
many of our products, we do not consider any single patent or
trademark or group of patents or trademarks to be material to
our business as a whole. We also rely on trade secret protection
for our confidential and proprietary information. We routinely
enter into confidentiality agreements with our employees and
suppliers. There can be no assurance, however, that others will
not independently obtain similar information or otherwise gain
access to our intellectual property.

Subsea Mudlift
Drilling.Hydril is pursuing the
commercialization of a dual gradient drilling technology. The
technology was developed through a joint industry project, of
which Hydril was the technical leader, designer and equipment
manufacturer.

The project developed a system of equipment and
drilling procedures which we believe will facilitate the
exploration and development of oil and gas reserves in certain
geologic formations found in ultra-deep water in excess of
5,000 feet. Available floating rigs with conventional
drilling equipment cannot efficiently tap the potentially
prolific reservoirs found in ultra-deep waters. A potential
solution to this problem is to have critical components of the
drilling mud recirculation system reside on the sea floor and
pump the drilling mud back to the surface from the sea floor.
Subsea mudlift drilling reduces the number of casing strings
needed, increases well diameter and production rates, and
facilitates more demanding completions. Additionally, subsea
mudlift drilling enables better control of well pressure,
resulting in fewer pressure surges and fewer problems with the
circulation of drilling mud.

The joint industry project was completed after it
successfully drilled a test well in the Gulf of Mexico in the
fourth quarter of 2001. Since completion of the joint industry
project, Hydril has continued separately to refine the design of
the equipment and pursue commercialization. Hydrils
expenditures to commercialize this technology were expensed in
2003 and 2002 and were less than 5% of total selling, general
and administrative expenses in each year. There can be no
assurance that our efforts to commercialize this technology will
be successful. There are other groups of companies in our
industry that are also developing competing technologies for
ultra-deepwater drilling.

Quik-LoqTMRam Blowout preventer.In 2002 and
2003, Hydril developed the Quik-LoqTM design for ram
blowout preventers which focuses on improving safety and
efficiency with tool-free opening and closing, as well as
360-degree access. The use of dual, redundant seals helps
increase environmental protection and permits maintenance and
performance tests to be conducted more efficiently. This
technology is expected to be used for new blowout preventer
stacks on land or larger jackup rigs, and floating rigs. The
first commercial Quik-Loq units were sold in 2003.

Expandable Premium
Connections.During 2002 and 2003,
Hydril continued its efforts to improve threaded connections.
During 2002, we had our first field deployment of an integral
connection for expandable tubular products. These products are
designed to address critical challenges associated with deep oil
and gas drilling.

Expandable casing allows exploration and
production company operators to successfully drill reservoirs
deeper and farther, with wells that could not be drilled
economically without this technology. Instead of using
telescoped strings of casing (progressively smaller
pipe as a well is drilled deeper), expandable casing is radially
expanded to a desired diameter with cone-like expansion or
rotary expansion tools. A critical element of the expandable
casing process is the threaded connections, which are designed
to maintain mechanical and pressure sealing integrity during and
after typical radial expansion of 10 to 20%.

9



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Expandable connections are used in three major
areas: to remediate old wells with leaky casing, in new wells to
reduce telescoping of casing strings, and on expandable
sand screens. Sand screens are perforated tubulars
which are used to reduce or eliminate the flow of sand from the
formation into the wellbore. Hydrils expandable threads
are currently used in the most common expandable casing
remediation process, and we continue testing threads for new
wells (including for larger diameter surface strings) and for
sand screens. To date, however, the sales of Hydril expandable
connections have not been material to our results.

See MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-RISK
FACTORS: If we do not develop, produce and commercialize new
competitive technologies and products, our revenue may
decline, If we do not develop, produce and
commercialize new competitive technologies and products, our
revenue may decline or we may be required to write-off any
capitalized investment and Limitations on our
ability to protect our intellectual property rights could cause
a loss in revenue and any competitive advantage we hold.



| |                                   
| | ----------------------------------
| | Our Customers and
    Distribution

The end-users for our products are primarily
major and independent, domestic and international oil and gas
companies, as well as drilling contractors. During 2003, we sold
products and services to approximately 1,040 customers, two of
which, accounted for more than 10% of our consolidated revenue.
One of these customers represented 13% and the other represented
11% of our consolidated revenue. See MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-RISK FACTORS: The consolidation or loss of end-users
of our products could adversely affect demand for our products
and services and reduce our revenue.

Premium Connection
Products.In the United States and
Canada, we sell our premium connection products primarily to
steel pipe distributors who purchase the tubulars from steel
mills and contract with us to apply the premium connection to
the tubular goods. Due to the use of distributors, we do not own
the pipe we thread and do not maintain an inventory of threaded
or unthreaded tubulars. However, we market our premium
connection products to the end-users, primarily exploration and
production company operators, because it is the end-users who
request their distributors to have our premium connection
applied to the pipe.

In 2003, our eight distributors accounted for 59%
of our premium connection sales in the United States and Canada.
In the United States, there has been significant consolidation
of tubular distributors, resulting in fewer distribution
alternatives for our products. If methods of distribution
change, many of our competitors may be better positioned than us
to take advantage of those changes. See MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-RISK FACTORS: 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.

Outside of the United States and Canada, we
primarily sell our premium connections directly to exploration
and production company operators. In these markets, we thread
tubulars owned by customers, as well as purchase tubulars for
threading and resale. Our premium connection products are sold
for use in more than 50 countries by our United States customers
operating abroad and by international customers.

In 2003, our largest premium connection customer
worldwide accounted for 21% of segment sales and our ten largest
premium connection customers accounted for 64% of total segment
sales.

Our premium connection sales staff is managed
from Houston, Texas and is located in 18 offices in the United
States, Canada, Malaysia, Singapore, Mexico, Nigeria, Venezuela,
United Arab Emirates and the United Kingdom. We use manufacturer
representatives in 50 countries worldwide.

Pressure Control
Products.Pressure control products
are sold both domestically and internationally primarily to
drilling contractors, although we market some of our pressure
control products to exploration and production company
operators. Certain lines of our pressure control equipment are
also sold to rig manufacturers and integrators of equipment.
Aftermarket replacement parts, repairs and field services are
provided to both drilling contractors and companies that rent
pressure control equipment. In 2003, our largest

10



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pressure control customer accounted for 27% of
segment sales. Our ten largest customers in our pressure control
segment in 2002 accounted for 65% of segment sales.


We market our pressure control products through
our direct sales force, distributors and authorized
representatives. Our pressure control products are sold for use
in more than 75 countries. Our pressure control sales staff is
managed from Houston and is located in 17 offices in the United
States, Canada, Mexico, Nigeria, Singapore the United Kingdom
and Venezuela. We use manufacturer representatives in 64
countries worldwide.



| |                
| | ---------------
| | Our Competitors

Our products are sold in highly competitive
markets. See MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-RISK FACTORS: The
intense competition in our industry could result in reduced
profitability and loss of market share for us.

Premium Connection
Products.In the premium connection
market, domestically we compete with the Atlas Bradford product
line of the Tubular Technology and Services segment of Grant
Prideco, Hunting Interlock product line of Hunting PLC, and the
VAM product line joint venture of Vallourec &
Mannesmann and Sumitomo Metals, as well as steel mills and
numerous other independent threaders. Internationally, we also
compete with some of our domestic competitors and with Tenaris,
whose operating subsidiaries include eight established steel
pipe manufacturers: AlgomaTubes, Confab, Dalmine, NKKTubes,
Siat, Siderca, Tavsa and Tamsa steel mills, which are licensed
to produce and sell the Atlas Bradford product line
internationally. In addition, we compete internationally with
Vallourec & Mannesmann, Sumitomo Metals and Kawasaki
Steel, each of which is vertically integrated through the
ownership of steel mills. Integrated steel mills can apply
threaded connections to tubulars they produce, which gives these
competitors supply and pricing advantages over companies such as
ours, which apply threaded connections to tubulars produced by
others. Other steel producers who do not currently manufacture
premium connections may begin doing so in the future. If
domestic or other foreign steel mills begin providing premium
threaded tubular goods directly to distributors or end-users,
they would have a competitive advantage over us. See
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-RISK FACTORS: 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.

We believe we are one of the largest providers of
premium connections to the oil and gas industry both in the
United States and worldwide. The principal competitive factors
in the premium connections market are product design and
engineering, product quality and reliability, price, product
uniformity and compatibility, and the ability to provide timely
field service and repair.

Pressure Control
Products.We have two primary
competitors in the pressure control market, the Cameron segment
of Cooper Cameron, and the Drilling Equipment Sales segment of
Varco International. There are also more than ten smaller
competitors. We believe that we are the largest manufacturer of
annular blowout preventers worldwide and a leading provider of
subsea pressure control equipment. We believe the principal
competitive factors in the pressure control products market are
product quality and reliability, product design and engineering,
price, and the ability to provide timely service and replacement
parts.



| |              
| | -------------
| | Our Employees

As of December 31, 2003, we had a total of
approximately 1,300 full-time and full-time equivalent
employees. Approximately 521 of those employees were employed by
our international subsidiaries and are located outside the
United States.

We are a party to two collective bargaining
agreements, which apply to approximately 63 employees located in
Veracruz, Mexico and approximately 43 employees in Port Harcourt
and Warri, Nigeria. These agreements are subject to annual
review. We believe our relations with our employees are good.

11



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| |          
| | ---------
| | Insurance

Our operations are subject to the risks inherent
in manufacturing products and providing services to the oil and
gas exploration and production industry. These risks include
personal injury and loss of life, business interruption, loss of
production and property and equipment damage. 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.

We maintain comprehensive insurance covering our
assets and operations, including product liability and
workers compensation insurance, at levels that we believe
to be appropriate. We attempt to obtain agreements from our
customers and vendors providing for indemnification against
liability to others. Our insurance is subject to deductibles and
in some cases only applies to losses in excess of significant
amounts. In such cases, we bear the risk of loss for claims
below these deductibles or amounts. We cannot assure you that
our insurance coverage will be adequate in all circumstances or
against all hazards nor can we assure you that we will be able
to maintain adequate insurance coverage in the future at
commercially reasonable rates or on acceptable terms.



| |                         
| | ------------------------
| | Environmental Regulation

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 United States and foreign operations 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, including painting
operations at certain locations, 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.

Because we use hazardous substances in our
manufacturing operations, we may be responsible for remediating
hazardous substances at our properties or at third party sites
to which we sent waste for disposal. In addition, we currently
own or lease, and have in the past owned or leased, numerous
properties that for many years have been used for industrial
purposes, including manufacturing. While we believe that we are
currently utilizing operating and disposal practices that are in
substantial compliance with applicable environmental laws and
regulations, historical operating and disposal practices that
were standard in the past may have resulted in the disposal or
release of wastes on or under the properties we owned or leased,
or on or under other locations where such wastes have been taken
for disposal. These properties and wastes may be subject to the
Comprehensive Environmental Response, Compensation, and
Liability Act, commonly known as CERCLA or Superfund, the
Resource Conservation and Recovery Act and analogous state laws.
Under these laws, we may be required to remove previously
disposed wastes and to remediate property contamination or to
perform remedial operations to prevent future contamination.

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

We have been identified as a potentially
responsible party under state law analogous to CERCLA with
respect to a waste disposal site near Houston, Texas. Based on
(1) the number of other potentially responsible

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parties, the total estimated site cleanup costs
and our estimated share of such costs, including the possibility
that our share of wastes may be viewed as de minimis by
government and other potentially responsible parties, and
(2) the availability of defenses to liability, including
the availability of the petroleum exclusion under
CERCLA and similar state laws, we do not expect this matter to
have a material adverse effect on our financial condition or
results of operation. We also have in the past been identified
as a potentially responsible party at other CERCLA or state
cleanup sites. In each case, we have resolved our liability
without incurring material costs.


Although we believe that we are in substantial
compliance with existing environmental laws and regulations, we
cannot assure you that we will not incur substantial costs in
the future. Moreover, it is possible that implementation of
stricter environmental laws, regulations and enforcement
policies could result in additional, currently unquantifiable
costs or liabilities to us.



| |                                    
| | -----------------------------------
| | International and Other
    Matters

In 2003, approximately 67% of our total revenue
was derived from equipment or services ultimately provided or
delivered to end-users outside the United States, and
approximately 28% of our revenue was derived from products which
were produced and used outside of the United States. See
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-RISK FACTORS: Our
international operations may experience severe interruptions due
to political, economic and other risks.

See Note 14 in the Consolidated Financial
Statements in Item 8 for segment and geographic information.






|         |           
|-------- | ----------
|Item 2  | Properties

The following table details our principal
facilities, all of which we own, except as indicated below.

|                                        |  |             |         |             |  |                                                                                     
|--------------------------------------- |  | ----------- | ------- | ----------- |  | ------------------------------------------------------------------------------------
|                                        |  | Approximate |         |            
|                                        |  | Square      |         |            
|Location                                |  | Footage     |         | Description
|                                        |  |             |         |            
|United States                           |  |             |         |             |  |                                                                                     
|Houston, Texas                          |  |             | 293,800 |             |  | Pressure control products manufacturing;
    principal executive offices.           
|Houston, Texas                          |  |             | 179,000 |             |  | Premium connection manufacturing.                                                   
|Houston, Texas                          |  |             | 100,000 |             |  | Pressure control elastomer products manufacturing.                                  
|Houston, Texas                          |  |             | 59,000  |             |  | Advanced composite tubing manufacturing (Premium
    Connection segment)            
|Bakersfield, California (leased)        |  |             | 8,000   |             |  | Premium connection manufacturing; warehouses
    pressure control replacement parts.
|Westwego, Louisiana                     |  |             | 40,000  |             |  | Premium connection manufacturing.                                                   
|International                           |  |             |         |             |  |                                                                                     
|Nisku, Alberta, Canada (leased)         |  |             | 48,000  |             |  | Premium connection manufacturing.                                                   
|Dartmouth, Nova Scotia, Canada (leased) |  |             | 15,600  |             |  | Premium connection manufacturing.                                                   
|Batam, Indonesia (Land is leased)       |  |             | 30,000  |             |  | Premium connection manufacturing.                                                   
|Veracruz, Mexico                        |  |             | 115,000 |             |  | Premium connection manufacturing.                                                   
|Veracruz, Mexico                        |  |             | 21,200  |             |  | Thread protector manufacturing for premium
    connections.                         
|Port Harcourt, Nigeria (leased)         |  |             | 10,000  |             |  | Repair and service of premium connections.                                          
|Warri, Nigeria                          |  |             | 20,000  |             |  | Repair and service of premium connections.                                          
|Aberdeen, Scotland                      |  |             | 20,000  |             |  | Premium connection manufacturing; warehouses
    pressure control replacement parts.

We have 25 sales and service offices worldwide in
Alaska, California, Louisiana, Texas, Wyoming,
Canada, Indonesia, Malaysia, Mexico, Nigeria, Singapore,
Venezuela and the United Kingdom. Most of these

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offices provide service personnel to support
drilling contractors and exploration and production company
operators. All of these offices are under lease, with leases
ranging in duration from one month to two years. Our subsea
mudlift drilling development and commercialization group is
located in a separate leased facility in Houston, Texas. We also
have approximately 116 acres of undeveloped land
surrounding some of the properties listed above and
approximately 73 acres of additional undeveloped land.







|         |                  
|-------- | -----------------
|Item 3  | Legal Proceedings

We are involved in legal proceedings arising in
the ordinary course of business. In our opinion, these matters
will not have a material adverse effect on our financial
position or results of operations.






|         |                                                        
|-------- | -------------------------------------------------------
|Item 4  | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote by
stockholders during the quarter ended December 31, 2003.






|                  |                                         
|----------------- | ----------------------------------------
|Item S-K 401(b)  | Executive Officers of the
    Registrant

The following table provides information
regarding our executive officers as of December 31, 2003.

|                         |  |     |    |             |  |                                                                                             
|------------------------ |  | --- | -- | ----------- |  | --------------------------------------------------------------------------------------------
|Name                     |  | Age |    | Position(s)
|                         |  |     |    |            
|Richard C. Seaver        |  |     | 81 |             |  | Chairman of the Board                                                                       
|Christopher T. Seaver    |  |     | 55 |             |  | President, Chief Executive Officer and Director                                             
|Charles E. Jones         |  |     | 44 |             |  | Executive Vice President and Chief Operating
    Officer                                    
|Neil G. Russell          |  |     | 58 |             |  | Senior Vice President-Premium Connections and
    Senior Vice President-Business Development
|E. Charles Chauviere III |  |     | 39 |             |  | Vice President-Pressure Control                                                             
|Michael C. Kearney       |  |     | 54 |             |  | Chief Financial Officer and Vice President-
    Finance                                     

Richard C. Seaveris
our Chairman of the Board, a position he has held since 1992.
Previously, Mr. Seaver has served as a director since 1964,
as President from 1964 to 1986, and as Secretary and General
Counsel from 1957 to 1964.

Christopher T. Seaveris our President, Chief Executive
Officer and a director. He has served as President since June
1993, and as Chief Executive Officer and as a director since
February 1997. He is a director and the secretary of the
Petroleum Equipment Suppliers Association, a director of the
American Petroleum Institute and a director of the National
Ocean Industries Association. Prior to joining Hydril,
Mr. Seaver was a corporate and securities attorney for
Paul, Hastings, Janofsky & Walker, and was a Foreign
Service Officer in the U.S. Department of State, with
postings in Kinshasa, Congo and Bogota, Colombia.

Charles E. Jonesis
our Executive Vice President and Chief Operating Officer, a
position he was appointed to beginning in June 2003. Previously,
he served as our Vice President of Pressure Control from
November 2001 to May 2003 and as our Managing Director-Pressure
Control from March 1998 to November 2001. From March 1996 to
March 1998, Mr. Jones served as Director of Subsea Business
for Cooper Cameron Corporation, a provider of oil and gas
drilling equipment. Mr. Jones served as Engineering Manager
for Subsea Offshore, formerly Dresser Industries, a manufacturer
of oil and gas drilling equipment from April 1995 to March 1996.
Prior to holding these positions, Mr. Jones had
11 years of service with us. Mr. Jones is a graduate
of the Harvard Business School Advanced Management Program.

Neil G. Russellis
our Senior Vice President-Premium Connections and Senior Vice
President-Business Development, a position he was appointed to
in May 2003. Previously, he was Vice President of our Premium
Connection segment, from November 2001 to May 2003 and Managing
Director-Eastern Hemisphere Premium Connection, from March 1995
to November 2001. Overall, Mr. Russell has 25 years of
service with our company, in which he has held various
management positions in our premium connection and pressure
control businesses with assignments in Singapore, Switzerland,
the United Kingdom and the United States.

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E. Charles Chauviere IIIis our Vice President-Pressure
Control, a position he was appointed to beginning in June 2003.
Mr. Chauviere joined Hydril in 1998, and previously served
as Director of Engineering beginning in February 2001.
Mr. Chauviere is a graduate of the Stanford University
Executive Program. Prior to joining Hydril he was employed for
10 years with Cooper Cameron Corporation.

Michael C. Kearneyis our Chief Financial Officer and
Vice President-Finance, positions he has held since August 1998.
Prior to joining our company, Mr. Kearney was a consultant
with Kearney Associates, an independent financial consulting
firm, from September 1996 to August 1998.




PART II






|         |                                                                              
|-------- | -----------------------------------------------------------------------------
|Item 5  | Market for the Registrants Common
    Equity and Related Stockholder Matters

Our common stock is traded on the Nasdaq National
Market under the symbol HYDL. The following table
shows the high and low sale prices of our common stock as
reported by the Nasdaq National Market for 2003 and 2002.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|2003           |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 26.68 |     |  | $ | 21.65 | 
|Second Quarter |  |      | 28.20 |     |  |   | 21.77 | 
|Third Quarter  |  |      | 27.48 |     |  |   | 19.75 | 
|Fourth Quarter |  |      | 26.20 |     |  |   | 20.00 | 
|2002           |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 27.05 |     |  | $ | 15.86 | 
|Second Quarter |  |      | 27.39 |     |  |   | 19.32 | 
|Third Quarter  |  |      | 28.25 |     |  |   | 20.75 | 
|Fourth Quarter |  |      | 29.72 |     |  |   | 20.02 | 

As of December 31, 2003, the closing sales
price per share of our common stock as reported by the Nasdaq
National Market was $24.01. Based on inquiries made in
connection with preparations for our 2004 Annual Meeting of
Stockholders, Hydril estimates that there are at least
1,600 beneficial holders of our common stock. Substantially
all of these beneficial holders maintain their shares in
street name or nominee accounts with
brokerage firms or other institutions and accordingly are not,
individually, stockholders of record. As of February 25,
2004, our common stock was held by 21 holders of record and
there were 43 holders of record of our class B common
stock.

We have no plans to declare or pay any dividends
on our common stock or our class B common stock for the
foreseeable future.

15



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|         |                        
|-------- | -----------------------
|Item 6  | Selected Financial Data

The following selected consolidated financial
data of Hydril should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated
financial statements and notes thereto included elsewhere in
this Form 10-K.

|                    |                                                                  |                                       |               |         |         |         |   |         |         |         |   |         |         |         |   |         |        |         |   |         |        |         | 
|------------------- | ---------------------------------------------------------------- | ------------------------------------- | ------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                    |                                                                  |                                      
|                    |                                                                  | Years Ended December 31,             
|                    |                                                                  |                                      
|                    |                                                                  | 2003                                  |               | 2002    |         | 2001    |   | 2000    |         | 1999   
|                    |                                                                  |                                       |               |         |         |         |   |         |         |        
|                    |                                                                  |                                      
|                    |                                                                  | (In thousands, except per share data)
|Operating Data:     |                                                                  |                                       |               |         |         |         |   |         |         |         |   |         |         |         |   |         |        |         |   |        
|                    | Revenue:                                                         |                                       |               |         |         |         |   |         |         |         |   |         |         |         |   |         |        |         |   |         |       
|                    |                                                                  | Premium connection                    |               | $       | 110,270 |         |   | $       | 127,116 |         |   | $       | 138,887 |         |   | $       | 94,983 |         |   | $       | 75,362 |        
|                    |                                                                  | Pressure control                      |               |         | 101,747 |         |   |         | 114,408 |         |   |         | 100,674 |         |   |         | 85,039 |         |   |         | 84,063 |        
|                    |                                                                  |                                       |               |         |         |         |   |         |         |         |   |         |         |         |   |         |        |         |   |        
|                    |                                                                  |                                       | Total revenue |         |         | 212,017 |   |         |         | 241,524 |   |         |         | 239,561 |   |         |        | 180,022 |   |         |        | 159,425 | 
|                    | Gross profit                                                     |                                       |               | 81,893  |         |         |   | 90,670  |         |         |   | 84,217  |         |         |   | 56,220  |        |         |   | 25,655  |       
|                    | Selling, general and administration expenses                     |                                       |               | 47,730  |         |         |   | 46,345  |         |         |   | 41,887  |         |         |   | 34,802  |        |         |   | 33,404  |       
|                    |                                                                  |                                       |               |         |         |         |   |         |         |         |   |         |         |         |   |         |        |         |   |        
|                    | Operating income (loss)                                          |                                       |               | 34,163  |         |         |   | 44,325  |         |         |   | 42,330  |         |         |   | 21,418  |        |         |   | (7,749  | )(1)  
|                    | Interest expense                                                 |                                       |               | 1,101   |         |         |   | 4,831   | (4)     |         |   | 4,403   |         |         |   | 4,963   |        |         |   | 5,528   |       
|                    | Interest income                                                  |                                       |               | 724     |         |         |   | 1,477   |         |         |   | 2,874   |         |         |   | 2,320   |        |         |   | 1,314   |       
|                    | Other income (expense)                                           |                                       |               | (135    | )       |         |   | (214    | )       |         |   | (1,082  | )(3)    |         |   | 5,433   | (2)    |         |   | 997     |       
|                    | Net income (loss)                                                |                                       | $             | 25,578  | (5)     |         | $ | 26,492  |         |         | $ | 25,619  |         |         | $ | 15,614  |        |         | $ | (7,237  | )     
|                    | Income (loss) per share(6):                                      |                                       |               |         |         |         |   |         |         |         |   |         |         |         |   |         |        |         |   |         |       
|                    |                                                                  | Basic                                 |               | $       | 1.13    |         |   | $       | 1.18    |         |   | $       | 1.15    |         |   | $       | 0.78   |         |   | $       | (0.37  | )      
|                    |                                                                  | Diluted                               |               | $       | 1.11    |         |   | $       | 1.16    |         |   | $       | 1.13    |         |   | $       | 0.76   |         |   | $       | (0.37  | )      
|                    | Weighted average shares outstanding(6):                          |                                       |               |         |         |         |   |         |         |         |   |         |         |         |   |         |        |         |   |         |       
|                    |                                                                  | Basic                                 |               |         | 22,711  |         |   |         | 22,414  |         |   |         | 22,211  |         |   |         | 20,023 |         |   |         | 19,379 |        
|                    |                                                                  | Diluted                               |               |         | 23,001  |         |   |         | 22,833  |         |   |         | 22,575  |         |   |         | 20,557 |         |   |         | 19,379 |        
|Other Data:         |                                                                  |                                       |               |         |         |         |   |         |         |         |   |         |         |         |   |         |        |         |   |        
|                    | Capital expenditures                                             |                                       | $             | 8,558   |         |         | $ | 17,928  |         |         | $ | 29,525  |         |         | $ | 13,575  |        |         | $ | 8,790   |       
|                    | Depreciation                                                     |                                       |               | 11,900  |         |         |   | 10,827  |         |         |   | 9,207   |         |         |   | 8,579   |        |         |   | 7,851   |       
|Balance Sheet Data: |                                                                  |                                       |               |         |         |         |   |         |         |         |   |         |         |         |   |         |        |         |   |        
|                    | Working capital                                                  |                                       | $             | 116,495 |         |         | $ | 90,483  |         |         | $ | 130,728 |         |         | $ | 116,911 |        |         | $ | 81,378  |       
|                    | Property, net                                                    |                                       |               | 105,047 |         |         |   | 107,031 |         |         |   | 100,038 |         |         |   | 79,070  |        |         |   | 74,579  |       
|                    | Total assets                                                     |                                       |               | 264,552 |         |         |   | 278,208 |         |         |   | 292,171 |         |         |   | 254,646 |        |         |   | 211,808 |       
|                    | Long-term debt and capital leases, excluding
    current portion |                                       |               |        |         |         |   |        |         |         |   | 60,000  |         |         |   | 60,286  |        |         |   | 73,039  |       
|                    | Other long-term liabilities                                      |                                       |               | 11,900  |         |         |   | 16,370  |         |         |   | 15,575  |         |         |   | 15,549  |        |         |   | 18,011  |       
|                    | Total stockholders equity                                       |                                       |               | 217,010 |         |         |   | 187,137 |         |         |   | 160,185 |         |         |   | 131,729 |        |         |   | 76,446  |       



---



|    |                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our 1999 results of operations includes a
    $10.5 million pre-tax warranty expense charge to replace
    some of our blowout preventer equipment.                                                                                                                                                                              
|   
|(2) | Other income for 2000 includes a pre-tax gain of
    $3.6 million for the settlement of a dispute with a
    financial institution from which Hydril purchased put options to
    sell stock of Weatherford International in 1998 and a pre-tax
    gain of $1.9 million from the sale of real estate not used
    in operations.
|   
|(3) | Includes $0.6 million in expenses incurred
    in facilitating the offering of common stock by certain of the
    Companys stockholders during the second quarter of 2001
    pursuant to a registration rights agreement.                                                                                                      

16



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|    |                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Includes a $1.2 million pre-tax make-whole
    premium attributable to the Companys prepayment of
    $30 million on its senior unsecured notes during the third
    quarter of 2002.                                                                                                                                                
|   
|(5) | Includes a research and experimentation income
    tax credit of $3.7 million related to qualified spending
    for the ten-year period from 1992 through 2001.                                                                                                                                                                       
|   
|(6) | Share and per share data have been retroactively
    restated to reflect the reclassification of pre-offering shares
    of common stock into shares of class B common stock and the
    dividend of five shares of class B common stock for each
    share of class B common stock, both of which occurred on
    September 25, 2000.




Item 7  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 consolidated financial
statements and notes thereto included elsewhere in this report.

Overview

We are engaged worldwide in engineering,
manufacturing and marketing premium connections and pressure
control products used for oil and gas drilling and production.
Our premium connection products are marketed primarily to
exploration and production company operators. 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 oil and gas production.

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.
Generally, increasing commodity prices result in increased oil
and gas exploration and production, which translates into
greater demand for oilfield products and services. Conversely,
falling commodity prices generally result in reduced demand for
oilfield products and services. Historically, changes in budgets
and activity levels by oil and gas exploration and production
companies have lagged significant movements in commodity prices.

The number of rigs drilling at target depths
greater than 15,000 feet and the number of rigs drilling in
water depths greater than 1,500 feet generally drive the
level of demand for our premium connection products. 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.

Beginning in mid-1999, the price of oil increased
significantly due to OPEC member countries reducing production
and recovering worldwide demand for oil. In addition, gas prices
increased significantly during this period and peaked in late
2000 as a result of low levels of gas storage in the United
States. These higher prices triggered a substantial increase in
the number of rigs drilling for oil and gas in the United States
and Canada. The average weekly rig count for the United States
and Canada combined for 2000, as measured by Baker Hughes,
increased 45% over the average weekly rig count for 1999. Rig
counts continued to improve during the first half of 2001 with
the combined rig count for the United States and Canada peaking
in July of 2001. These improvements in market fundamentals
stimulated an increase in the demand for our products in the
United States and Canada, in particular premium connection
products and pressure control aftermarket replacement parts. In
response to this increase in demand, we completed a 50%
expansion of our premium connection capacity at our plant in
Nisku, Canada in January 2001, and increased capacity in the
United States by 30% during 2000 and 2001.

However, beginning mid-2001, commodity prices
started to fall, particularly natural gas prices, which fell
sharply, and averaged $2.34 mm btu (Henry Hub) in the
fourth quarter of 2001, down 63% from the first quarter. West
Texas Intermediate crude oil prices declined as well, from an
average of $28.90 per barrel in the first quarter of 2001
to an average of $20.37 per barrel in the fourth quarter,
down 30%. This decline in

17



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commodity prices led to a decline in drilling
activity in the United States and Canada, in particular in the
number of rigs drilling in deep formations for natural gas in
North America. The rig counts in the United States and Canada
combined, as measured by Baker Hughes, fell 33% from July 2001
to December 2001. This decrease included a reduction in the
number of rigs drilling over 15,000 feet and the number of
rigs in water depths greater than 1,500 feet. As a result,
in the fourth quarter of 2001 we began to experience a decline
in demand for premium connections and late in that quarter, a
significant decrease in plant utilization in the United States.
Accordingly, we reduced our premium connection workforce at our
manufacturing facilities in the United States by approximately
30% in January 2002.


During 2002, commodity prices began to recover
from their levels in the fourth quarter of 2001. From the fourth
quarter of 2001 to the fourth quarter of 2002, U.S. natural
gas prices increased 82% and U.S. crude oil prices rose
39%. However, the commodity price recovery, which in part was
fueled by global uncertainties over the war with Iraq and
political unrest and a labor strike in Venezuela, was
accompanied by a decrease in drilling activity. For 2002,
several factors contributed to the decrease in spending by oil
and gas companies for oil and gas exploration and development in
the United States despite increasing commodity prices. First,
the downturn in the U.S. economy during 2002 resulted in
reduced capital spending by our customers. These conservative
spending practices focused on balance sheet improvements,
primarily paying down debt, rather than spending for exploration
and production. In addition, the uncertainty of global events,
most significantly the possibility of a war in Iraq, led to less
spending. As a result, rig counts in the United States and
Canada were reduced and demand for premium connections and
aftermarket parts and service decreased during 2002.

Commodity prices during 2003 were relatively
stable and up slightly from the fourth quarter of 2002. Crude
oil prices (West Texas Intermediate) averaged $31.17 per
barrel during 2003, up 19% from the 2002 average. Natural gas
prices (Henry Hub mmbtu) averaged $5.46 during 2003 up 64% from
the 2002 average. As a result of higher, more stable commodity
prices during the year, drilling activity in the United States
rose throughout the year. The U.S. rig count ended 2003 at
1,126, which was 31% above year end 2002. The average
U.S. deep formation rig count (rigs drilling to a target
depth greater than 15,000 feet) ended 2003 at 173, an
increase of 40% over year end 2002. The international rig count
(rigs drilling outside of the United States and Canada) ended
2003 at 803, up 7% from the year-ended 2002. The worldwide
offshore rig count for the year-ended 2003 of 357 was up 9%
compared with the year-ended 2002.

Despite stable commodity prices and rising rig
counts in the United States, our revenue declined in both our
premium connection and pressure control segments. For premium
connections, this decline was the result of reduced demand in
certain international markets, in part due to political and
civil uncertainties, and lower demand in the U.S. and Canadian
market as a result of our distributors reducing inventory
stocking levels and placing only limited replenishment orders.
In addition deep-formation and deep-water drilling activity did
not recover proportionately to the overall rig count increase.
Many of the rigs returning to work in the United States and
Canada during 2003 were for shallow wells that do not require
premium connection products. Our international premium
connection business typically has longer lead times than our
North American business, generally three to six months, and is
generally not impacted by rig count changes in North America.
The international rig count (rigs drilling outside of the United
States and Canada) ended 2003 at 803, up 7% from the year-ended
2002. The increase in international drilling activity in 2003
reflected rising rig counts in certain markets. However,
declining rig counts in some key oil and gas markets had an
adverse effect. The level of demand in our key international
markets can fluctuate significantly depending on levels of
political stability, civil unrest and general economic
conditions. During 2003, Venezuela and Nigeria had periods of
instability which reduced the level of drilling activity and the
demand for our products.

Demand in the industry for new pressure control
capital equipment was not as strong during the period of 2000
through 2003 as compared to demand for aftermarket replacement
parts, due to the low level of rig construction and
refurbishment worldwide. However, in March 2001, our pressure
control segment received a $37 million order for four
offshore drilling blowout prevention and control systems from
GlobalSantaFe Corporation. Additionally during 2001 we received
two orders from a subsidiary of Diamond Offshore
Drilling, Inc. for blowout preventer multiplex control
systems. During 2002 and 2003, we benefited from these orders as
revenue and gross profit was recognized using the
percentage-of-completion accounting method and

18



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##### Table of Contents



significant progress was made during the year.
Substantially all of these orders were completed during 2002 and
2003.


During 2003, the capital equipment market
continued to be weak, and we received no new significant capital
equipment orders. Due to these market conditions, capital
equipment revenue decreased during the year and was 26% below
the level in 2002. However, because of the increasing
U.S. rig count during 2003 the pressure control aftermarket
business increased by 7% over 2002 and partially offset the
decline in capital equipment.



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

With the exception of revenue from pressure
control long-term projects, we record revenue for all products
and services at the time such products are delivered or services
are provided. In 2003, 87% of our revenue was recorded on this
basis. For our pressure control long-term projects (which are
generally contracts from six to eighteen months in duration and
an estimated contract price in excess of $1 million), we
recognize revenue using the percentage-of-completion method,
measured by the percentage of cost incurred to estimated final
cost. We use this method because we consider expended contract
costs to be the best available measure of progress on these
contracts. If a long-term contract was anticipated to have an
estimated loss, such loss would be recognized in the period in
which the loss becomes apparent. See CRITICAL ACCOUNTING
POLICIES AND ESTIMATES for more information regarding
estimates and assumptions relating to revenue recognition.



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

Our gross profit is the difference between our
revenue and our cost of sales. Cost of sales for our products
include purchased raw materials and components, manufacturing
labor, plant overhead expenses, a portion of engineering
expenses, and building and equipment depreciation. Some of the
costs are fixed cost and cause our margins to suffer when demand
is low and manufacturing capacity is underutilized. Also
included in cost of sales are the costs of product warranty,
product liability insurance and inventory valuation adjustments,
including last in, first out inventory valuation adjustments and
adjustments for obsolete and slow-moving inventory. We do not
take title to the tubulars we thread for the United States and
Canadian market, and therefore, own no inventories of tubulars
for sales in these countries. However, we purchase tubulars for
fulfilling a portion of our existing orders outside of the
United States and Canada, which is generally less than 10% of
our total revenue. For our pressure control products, we have
inventory for existing orders in process as well as a
replacement parts inventory both internationally and
domestically. A majority of our inventory is for our pressure
control segment.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administration
    Expenses

Our selling, general and administration expenses
include engineering expenses that relate to research, product
design, development and maintenance; as well as sales and
marketing expenses, which consist mostly of personnel and
related expenses, and commissions paid to third-party agents
selling our products. Also included are general and
administration expenses that relate to accounting, treasury,
information technology, human resources, legal expenses and
corporate overhead.



| |                        
| | -----------------------
| | Operating Income (Loss)

Our operating income (loss) is gross profit less
selling, general and administration expenses. Operating income
(loss) is comprised of the operating income of each of our
premium connection and pressure control segments and the portion
of selling, general and administration expenses, referred to as
corporate administration, which is not allocated to either
segment.

19



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##### Table of Contents



Results of Operations for the Years Ended
December 31, 2003 and 2002



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

Total revenue decreased $29.5 million, or
12%, to $212.0 million for 2003 from $241.5 million in
2002. Premium connection revenue decreased 13% to
$110.3 million and pressure control revenue decreased 11%
to $101.7 million. The decrease in premium connection
revenue was primarily the result of lower demand in certain
international markets, primarily West Africa, due in part to
political and civil uncertainties, and the United States as a
result of our distributors reducing inventory stocking levels
and placing only limited replenishment orders. The decrease in
pressure control revenue was attributable to a 26% decrease in
revenue from capital equipment due to a lower level of long-term
capital 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 7% increase
in aftermarket revenue due to an increase in the U.S. total
rig count and consumption of spare parts in the drilling process.



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

Gross profit decreased $8.8 million, or 10%,
to $81.9 million for 2003 from $90.7 million in 2002.
This decline was not as severe 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
increased $1.4 million to $47.7 million for 2003
compared to $46.3 million for 2002. This increase was the
result of consulting fees related to the research and
experimentation income tax credit study (see Provision for
Income Taxes below for details), and other tax planning
strategies, expenses related to merger and acquisition
activities, and higher legal expenses related to corporate
governance compliance, which were partially offset by lower
management incentive accruals. As a percentage of sales,
selling, general and administrative expenses increased from 19%
for 2002 to 23% for 2003.



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

Operating income decreased $10.1 million to
$34.2 million for 2003, compared to $44.3 million for
2002. Operating income for our premium connection segment
decreased 25% to $27.6 million for 2003 compared to
$36.7 million for 2002. Operating income for our pressure
control segment increased $0.6 million, or 3%, from
$19.7 million for 2002 to $20.3 million for 2003.
Corporate and administration expenses were $13.7 million
for 2003 compared to $12.1 million in 2002.



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

Interest expense decreased $3.7 million to
$1.1 million for 2003, from $4.8 million in 2002. The
reduction in interest expense was due to lower outstanding debt
compared to 2002 as well as the payoff of our remaining debt at
the end of the second quarter of 2003.



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

The Provision for income taxes decreased
$6.2 million to $8.1 million for 2003 compared to
$14.3 million for 2002. This decrease was primarily the
result of a research and experimentation tax credit of
$3.7 million that was 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.

20



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##### Table of Contents



Results of Operations for the Years Ended
December 31, 2002 and 2001



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

Total revenue increased $1.9 million, or 1%,
to $241.5 million for 2002 from $239.6 million in
2001. Premium connection revenue decreased 8% to
$127.1 million and pressure control revenue increased 14%
to $114.4 million. The decrease in premium connection
revenue was primarily the result of decreased demand for our
products and services as a result of decreased drilling activity
in our North American (United States and Canada) markets. This
decrease was partially offset by higher revenue from our
international premium connections as a result of strong demand
in our niche markets. The increase in pressure control revenue
was attributable to a 47% increase in revenue from capital
equipment due to an increase in percentage-of-completion
accounting method revenue from project orders received during
2001 and 2002. This increase was partially offset by an 11%
decrease in aftermarket replacement parts revenue due to lower
worldwide offshore drilling rig activity and declines in the
United States rig count.



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

Gross profit increased $6.5 million to
$90.7 million for 2002 from $84.2 million in 2001. The
increase was primarily due to increased efficiencies in our
premium connection plants and a product mix shift in our premium
connection segment to higher-margin products, partially offset
by lower margins in the pressure control segment resulting from
the increase in capital equipment revenue and the decrease in
aftermarket replacement parts sales.



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

Selling, general and administrative expenses
increased $4.4 million to $46.3 million for 2002
compared to $41.9 million for 2001. The increase was due to
higher engineering costs to support research and development
activities, engineering design expenses to support the higher
pressure control capital equipment project backlog during the
year, a full-year of subsea mudlift drilling expenses related to
advancing and commercializing the technology and higher sales
and marketing expenses to support international markets. As a
percentage of sales, selling, general and administrative
expenses increased from 17% for 2001 to 19% for 2002.



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

Operating income increased $2.0 million to
$44.3 million for 2002, compared to $42.3 million for
2001. Operating income for our premium connection segment
increased 17% to $36.7 million for 2002 compared to
$31.5 million for 2001. Operating income for our pressure
control segment decreased $1.5 million, or 7%, from
$21.2 million for 2001 to $19.7 million for 2002.
Corporate and administration expenses were $12.1 million
for 2002 compared to $10.3 million in 2001.



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

Interest expense increased $0.4 million to
$4.8 million for 2002 from $4.4 million for 2001. The
increase was the result of a $1.2 million make-whole
premium on our prepayment of $30 million of our senior
unsecured notes in August 2002, which was partially offset by
lower interest expense for the remainder of the year.



| |              
| | -------------
| | Other Expense

Other expense was $0.2 million for 2002
compared to $1.1 million for 2001. Other expense for 2002
included $0.4 million to maintain surplus real estate and
facilities not used in operations, which was partially offset by
miscellaneous income items. Other expense for 2001 included
$0.6 million in expenses incurred in facilitating the
offering of common stock by certain of our stockholders in the
second quarter of 2001 and $0.5 million to maintain surplus
real estate and facilities not used in operations. For further
information on these transactions, see Note 9 in the Notes
to Consolidated Financial Statements.

21



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##### Table of Contents



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.

In 2003, we also repaid $30 million of
senior notes at maturity and as a result have no long-term debt
outstanding. In addition, we made a $7.0 million
contribution to our frozen defined benefit pension plan, which,
after the contribution, had an unfunded benefit obligation of
approximately $0.9 million at December 31, 2003. Based
on current expectations, we do not plan to make any additional
contributions to the plan during 2004.



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

Cash provided by operating activities was
$28.2 million for 2003 and $28.3 million for 2002.
Cash provided by operations in 2003 was primarily due to
earnings and contractual cash payments received from customers
on long-term capital equipment projects, which was partially
offset by a $7.0 million contribution to the
U.S. defined benefit pension plan. Cash provided by
operations in 2002 was primarily from earnings, contractual cash
payments received from customers for progress made on capital
equipment long-term projects and utilization of deferred tax
assets, the effects of which were partially offset by higher
working capital requirements. The decrease in cash provided by
operations in 2002 of $16.8 million as compared to 2001 was
primarily due to the expenditure of contractual cash payments
from customers received in 2001 for completion of large project
orders.



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

Net cash used in investing activities for 2003
was $7.9 million compared to $27.5 million in 2002.
The investment of cash in 2003 was primarily for capital
spending while the net cash used in investing activities for
2002 was attributable to capital spending of $17.9 million
and net investments in held-to-maturity securities of
$9.6 million. The investment of cash in 2001 of
$29.5 million was solely for capital expenditures.

For more information on capital expenditures for
the three years ended December 31, 2003 see Capital
Expenditures below.



| |                  
| | -----------------
| | 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 December 31, 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 December 31, 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
December 31, 2003 there was approximately $0.3 million
outstanding in letters of credit.

22



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

The following paragraph summarizes the
Companys contractual cash obligations as of
December 31, 2003.

|                        |  |                        |      |      |  |           |      |           |  |            |     |  |  |   |     |  |  |   |   | 
|----------------------- |  | ---------------------- | ---- | ---- |  | --------- | ---- | --------- |  | ---------- | --- |  |  | - | --- |  |  | - | - | 
|                        |  |                       
|                        |  | Payments Due by Period
|                        |  |                       
|                        |  | Total                  |      | 2004 |  | 2005-2006 |      | 2007-2008 |  | Thereafter
|                        |  |                        |      |      |  |           |      |           |  |           
|                        |  |                       
|                        |  | (In millions)         
|Operating leases(1)     |  | $                      | 3.6  |      |  | $         | 1.8  |           |  | $          | 1.6 |  |  | $ | 0.2 |  |  | $ |  | 
|                        |  |                        |      |      |  |           |      |           |  |            |     |  |  |   |     |  |  |   |   | 
|Purchase Obligations(2) |  |                        | 10.0 |      |  |           | 9.8  |           |  |            | 0.2 |  |  |   |    |  |  |   |  | 
|                        |  |                        |      |      |  |           |      |           |  |            |     |  |  |   |     |  |  |   |   | 
|Total(3)                |  | $                      | 13.6 |      |  | $         | 11.6 |           |  | $          | 1.8 |  |  | $ | 0.2 |  |  | $ |  | 
|                        |  |                        |      |      |  |           |      |           |  |            |     |  |  |   |     |  |  |   |   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents obligations for minimum payments under
    noncancelable operating leases. The Companys lease
    commitments are primarily for operating facilities, vehicles and
    equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(2) | Represents obligations under outstanding purchase
    orders and other commitments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(3) | The table excludes other long-term liabilities
    reflected on the Companys balance sheet which consists
    primarily of post retirement, health and life benefits. This
    amount is impacted by, among other things, funding levels and
    changes in plan assumptions. The accrued liability does not
    represent expected liquidity needs. The average payout under the
    post retirement health benefits plan over the past five years
    was approximately $0.6 million per year. See Note 6 of
    the Notes to the Consolidated Financial Statements for
    information regarding the Companys obligation under the
    defined benefit pension plan and the post retirement health and
    life benefit plans.



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

In June 1998, the Company issued
$60.0 million of 6.85% senior notes due June 30,
2003. During the third quarter of 2002, the Company prepaid
$30.0 million of the aggregate principal amount of the
unsecured notes plus a make-whole premium of $1.2 million
relating to this prepayment. The make-whole premium was included
as interest expense in the consolidated statement of operations.
The Company repaid the remaining $30.0 million at maturity
on June 30, 2003.



| |           
| | ----------
| | Technology

The joint industry project to develop dual
gradient drilling technology completed its work by successfully
drilling a test well in the Gulf of Mexico in the fourth quarter
of 2001. During 2002 and 2003, Hydril continued separately to
refine the design of the equipment and pursue commercialization.
Expenditures to commercialize this technology were expensed in
2003 and 2002 and were less than 5% of total selling, general
and administrative expenses in each year.



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

Capital expenditures for 2003 were
$8.5 million, which included $3.7 million for our
premium connection segment and $3.5 million for our
pressure control segment, in both cases primarily to support
plant and equipment for our manufacturing operations, and
$1.3 million for general corporate purposes.

Capital expenditures for 2002 were
$17.9 million, which included $9.6 million in our
premium connection segment of which $7.6 million related to
plant capacity expansion and $2.0 million related to
support of manufacturing operations. Also included was
$7.1 million in our pressure control segment, of which
$4.4 million was used to replace and refurbish machine
tools and to construct a new deepwater assembly building for
blowout preventer stack assembly at our Houston plant and
$2.7 million was used to support engineering research and
development and manufacturing operations. Capital expenditures
for general corporate purposes were $1.2 million for 2002.

Capital expenditures for 2001 were
$29.5 million, which consisted of $18.7 million for
our premium connection business, primarily related to the
expansion of manufacturing capacity in North America,

23



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$9.2 million for our pressure control
segment, primarily for the replacement and upgrade of
manufacturing machine tools, and $1.6 million for general
corporate purposes.


If current industry conditions continue, we
expect our 2004 capital expenditures to be approximately $7.0 to
$9.0 million, primarily to support manufacturing operations
and engineering, research and development activities.



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

We have no plans to declare or pay any dividends
on our common stock or our class B common stock for the
foreseeable future.

Backlog

Pressure control capital equipment backlog which
includes orders for capital equipment and long-term projects, at
December 31, 2003 and 2002 was $11.5 million and
$32.5 million, respectively. The decrease was the result of
work completed and revenue recognized on several large long-term
capital equipment project orders and no new substantial project
orders were received during the year. Substantially all of the
remaining revenue from projects currently in backlog is expected
to be recorded during the first half 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 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.

Tax Matters

As of December 31, 2003, we had deferred tax
assets, net of deferred tax liabilities, of $9.9 million.
These assets are benefits to us as long as we expect to have
sufficient future income in the United States.

Management projections indicate that sufficient
income will be generated in future years to realize the tax
assets, and therefore, no valuation allowance was required.

Critical Accounting Policies and
Estimates

Our accounting policies are described in
Note 1 in the Notes to Consolidated Financial Statements in
Item 8. 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 cashflows.



| |                    
| | -------------------
| | 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 with 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.

24



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##### Table of Contents



Revenue from long-term contracts was
approximately 13%, 16% and 8% of total revenue for the years
ended December 31, 2003, 2002 and 2001, respectively.
Pressure control capital equipment backlog, which includes
long-term contract revenue, was $11.5 million,
$32.5 million and $55.8 million for the years ended
December 31, 2003, 2002 and 2001, respectively.




| |            
| | -----------
| | 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
(LIFO) method for substantially all pressure control
products (approximately 84% and 85% of total gross inventories
at December 31, 2003 and 2002, respectively) and by the
first-in, first-out (FIFO) method for all other
inventories. If the FIFO method had been used to value all
inventories, the cost would have been $13.4 million,
$13.3 million and $12.1 million higher at
December 31, 2003, 2002 and 2001, respectively.

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. Additions to the excess or
obsolete reserve can result from downturns in market demand for
specific products, new technology that renders certain products
obsolete or changes in customer purchasing decisions resulting
from a shift in market activity. Additions to the reserve were
$4.0 million, $3.9 million and $3.8 million for
the years ended December 31, 2003, 2002 and 2001,
respectively.



| |                   
| | ------------------
| | 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 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.
Additions to the warranty accrual result from delivery of new
capital equipment projects with a specified warranty period,
other capital equipment and replacement parts that carry a
specified warranty period and for known product warranty claims.
Additions to the warranty accrual were $0.3 million,
$0.7 million and $3.0 million for the years ended
December 31, 2003, 2002 and 2001, respectively.



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

The Company has a frozen defined benefit pension
plan covering substantially all of its U.S. employees.
Benefits are based on the employees years of service and
compensation. Plan assets consist primarily of investments in
equities and fixed income funds. No additional benefits are
being accrued under this plan which was frozen effective
December 31, 2001. At December 31, 2003, the Company
had an estimated unfunded pension obligation under the plan of
$0.9 million. This estimated amount is based on various
assumptions regarding the rate of return on pension assets,
salary increases and other matters. Beginning January 1,
2002, the Company initiated a new retirement defined
contribution plan to replace the previous plan covering
substantially all of its U.S. employees. See Note 6 in
the Notes to Consolidated Financial Statements in Item 8
for more information regarding the pension plan.



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

The Company provides certain medical, life
insurance and/or dental benefits for eligible employees, hired
before December 31, 1989, who have or will retire under one
of the Companys pension plans. At December 31, 2003,
the Company had an estimated unfunded obligation for retiree
life and health of approximately $8.9 million. This
estimated amount is based on assumptions regarding healthcare
cost trends and certain employee-related factors, such as
turnover, retirement age and mortality.

The assumed health care cost trend rates have a
significant effect on the amounts reported for the post
retirement health and life plan. A 12% annual rate of increase
in the per capita cost of both pre-age 65 and
post-age 65 covered health care benefits was assumed for
2003 in determining the benefit obligation for the

25



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post retirement health and life plan. This rate
is assumed to decrease gradually to 5% for 2011 and remain at
that level thereafter. See Note 6 to the Notes to
Consolidated Financial Statements in Item 8 for more
information regarding Post Retirement Health and Life Benefits,
including sensitivity analysis regarding changes in assumed
health care cost trend rates.


Risk Factors

You should consider carefully the following risk
factors and all other information contained in this report. 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
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 in Iraq, Nigeria and Venezuela;
|
| |  | the cost of producing oil and gas;                                                                                                                           
|
| |  | interest rates and the cost of capital;                                                                                                                      
|
| |  | technological advances affecting hydrocarbon
    consumption, particularly oil and gas;                                                                      
|
| |  | environmental regulation;                                                                                                                                    
|
| |  | level of oil and gas inventories in storage;                                                                                                                 
|
| |  | tax policies;                                                                                                                                                
|
| |  | 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.

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

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 2003,
our eight distributors accounted for 59% 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 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.

During 2003, we derived approximately 67% 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.

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

In 2003, approximately 67% of our total revenue
was derived from services or equipment ultimately provided or
delivered to end-users outside the United States, and
approximately 28% 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
violence, which have disrupted oil and gas exploration and
production operations located there as well as day-to-day
operations and oversight of our business from time to time.
These disruptions have affected our operations and 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 potential
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. In
addition, many oil and gas properties will be transferred over
time to different potential customers.

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

29



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overall lower post-merger exploration and
development budgets. Moreover, some end-users are not as
risk-averse and, as such, do not use as many premium products in
drilling deep formation wells.


In 2003, our largest premium connection customer
accounted for 21% of segment sales, and our ten largest premium
connection customers accounted for 64% of total segment sales.
In 2003, our largest pressure control customer accounted for 27%
of segment sales and our ten largest pressure control customers
accounted for 65% of segment sales.

The loss of one or more of our end-users, a
reduction in exploration and development budgets as a result of
industry consolidation or other reasons or a transfer of deep
formation drilling prospects to end-users that do not rely as
heavily on premium products could adversely affect demand for
our products and services and reduce our revenue.

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 or we may be required to write-off any
capitalized investment.

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.

For example, we have invested significant amounts
in the development of new technologies, such as advanced
composite tubing and subsea mudlift drilling. We are now in the
process of refining the design of subsea mudlift drilling
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. In addition, the cost to implement the
technology may be high and there may be little demand for the
completed 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

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prospects may be reduced and the level of our
future revenue may be materially and adversely affected. In
addition, we could be required to write-off any capitalized
investment in a 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.


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.

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  Finance. 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.

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 pressure control
long-term projects is expected to be realized over the next two
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 new project orders are not
received. In addition, our fixed costs cause our margins to
decrease when demand is low and manufacturing capacity is
underutilized.

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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. 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.

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.

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

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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 elsewhere in this
report 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
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.

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;       
|
| |  | 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.

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.

Recent Accounting Pronouncements

In December 2003, we adopted
SFAS No. 132 (Revised 2003), Employees
Disclosures about Pensions and Other Post Retirement
Benefits. The statement requires additional disclosures
relating to pensions and other post retirement benefits, which
we have included in Note 6.

In December 2003, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the
Act) was passed. The Act introduces a prescription
drug benefit under Medicare (Medicare Part D), as well as a
federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent
to Medicare Part D. In January 2004, the FASB issued FASB Staff
Position

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No. FAS 106-1, Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug Improvements and Modernization Act of 2003
(FAS 106-1), which is effective for us as of
December 31, 2003 and permits a one-time election to defer
accounting for the effects of the Act. In accordance with
FAS 106-1, we have elected to defer accounting for the
effects of the Act and, as such, any measures of the
postretirement benefit obligations or net periodic
postretirement cost in the financial statements or accompanying
notes do not reflect the effects of the Act. Specific
authoritative guidance on the accounting for the federal subsidy
is pending and that guidance, when issued, could require us to
change previously reported information. However, we believe the
effect of the Act will not be material to our future results of
operations and financial condition.


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 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 13 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,

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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
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.



Item 7A.  Quantitative and
Qualitative Disclosures About Market Risk

Interest Rate Risk

There were no outstanding borrowings under our
lines of credit at December 31, 2003. Floating-rate
obligations expose us to the risk of increased interest expense
in the event of increases in short-term interest rates.

At December 31, 2003 or 2002, we did not
hedge interest rate exposure.

Foreign Currency Exchange Rate

Our operations are conducted in certain countries
around the world in a number of different currencies. As such,
future earnings are subject to change due to changes in foreign
currency exchange rates when transactions are denominated in
currencies other than our functional currency, the
U.S. dollar. In order to mitigate the effect of exchange
rate changes, a substantial portion of our contracts provide for
collections from customers in U.S. dollars. In 2003,
revenue from our international subsidiaries was
$78.9 million, with $37.9 million denominated in
foreign currency. Of these foreign currency denominated sales,
$26.0 million were in local currency, but based on the
exchange rate for the U.S. dollar at the time of shipment.

We had no foreign currency denominated borrowings
outstanding at December 31, 2003 or 2002.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

HYDRIL

INDEX TO FINANCIAL STATEMENTS

|                                           |                                                                                                                   |      |    |       | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------- | ---- | -- | ----- | 
|                                           |                                                                                                                   | Page
|                                           |                                                                                                                   |     
|INDEPENDENT AUDITORS REPORT               |                                                                                                                   |      | 37 |      
|FINANCIAL STATEMENTS:                      |                                                                                                                   |      |    |      
|                                           | Consolidated Balance Sheets 
    December 31, 2003 and 2002                                                      |      |    | 38-39 | 
|                                           | Consolidated Statements of Operations 
    Years Ended December 31, 2003, 2002 and 2001                          |      |    | 40    | 
|                                           | Consolidated Statements of Changes in
    Stockholders Equity  Years Ended
    December 31, 2003, 2002 and 2001 |      |    | 41    | 
|                                           | Consolidated Statements of Cash Flows 
    Years Ended December 31, 2003, 2002 and 2001                          |      |    | 42    | 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |                                                                                                                   |      | 43 |      

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INDEPENDENT AUDITORS REPORT

To the Stockholders and the Board of Directors of
Hydril Company:

We have audited the accompanying consolidated
balance sheets of Hydril Company and subsidiaries (the
Company) as of December 31, 2003 and 2002, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2003. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2003
and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Houston, Texas

March 1, 2004


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HYDRIL COMPANY

CONSOLIDATED BALANCE SHEETS

|                        |                                                |                                                                             |                      |          |        |         |   |          |        |         | 
|----------------------- | ---------------------------------------------- | --------------------------------------------------------------------------- | -------------------- | -------- | ------ | ------- | - | -------- | ------ | ------- | 
|                        |                                                |                                                                            
|                        |                                                | December 31,                                                               
|                        |                                                |                                                                            
|                        |                                                | 2003                                                                        |                      | 2002    
|                        |                                                |                                                                             |                      |         
|                        |                                                |                                                                            
|                        |                                                | (In thousands, except share                                                
|                        |                                                | and per share information)                                                 
|CURRENT ASSETS:         |                                                |                                                                             |                      |          |        |         |   |         
|                        | Cash and cash equivalents                      |                                                                             | $                    | 54,139   |        |         | $ | 61,590   |       
|                        | Investments                                    |                                                                             |                      | 6,831    |        |         |   | 7,899    |       
|                        | Receivables:                                   |                                                                             |                      |          |        |         |   |          |       
|                        |                                                | Trade, less allowance for doubtful accounts:
    2003, $1,127; 2002, $1,039 |                      |          | 34,886 |         |   |          | 35,393 |        
|                        |                                                | Contract costs and estimated earnings in excess
    of billings             |                      |          | 4,366  |         |   |          | 4,829  |        
|                        |                                                | Other                                                                       |                      |          | 1,842  |         |   |          | 396    |        
|                        |                                                |                                                                             |                      |          |        |         |   |         
|                        |                                                |                                                                             | Total receivables    |          |        | 41,094  |   |          |        | 40,618  | 
|                        |                                                |                                                                             |                      |          |        |         |   |         
|                        | Inventories:                                   |                                                                             |                      |          |        |         |   |          |       
|                        |                                                | Finished goods                                                              |                      |          | 24,190 |         |   |          | 28,779 |        
|                        |                                                | Work-in-process                                                             |                      |          | 5,320  |         |   |          | 5,025  |        
|                        |                                                | Raw materials                                                               |                      |          | 6,906  |         |   |          | 7,680  |        
|                        |                                                |                                                                             |                      |          |        |         |   |         
|                        |                                                |                                                                             | Total inventories    |          |        | 36,416  |   |          |        | 41,484  | 
|                        |                                                |                                                                             |                      |          |        |         |   |         
|                        | Deferred tax asset                             |                                                                             |                      | 9,095    |        |         |   | 9,164    |       
|                        | Other current assets                           |                                                                             |                      | 4,422    |        |         |   | 3,851    |       
|                        |                                                |                                                                             |                      |          |        |         |   |         
|                        |                                                |                                                                             | Total current assets |          |        | 151,997 |   |          |        | 164,606 | 
|                        |                                                |                                                                             |                      |          |        |         |   |         
|PROPERTY:               |                                                |                                                                             |                      |          |        |         |   |         
|                        | Land and improvements                          |                                                                             |                      | 21,021   |        |         |   | 20,031   |       
|                        | Buildings and improvements                     |                                                                             |                      | 53,217   |        |         |   | 51,061   |       
|                        | Machinery and equipment                        |                                                                             |                      | 163,574  |        |         |   | 156,175  |       
|                        | Construction-in-progress                       |                                                                             |                      | 2,106    |        |         |   | 3,569    |       
|                        |                                                |                                                                             |                      |          |        |         |   |         
|                        |                                                |                                                                             | Total                |          |        | 239,918 |   |          |        | 230,836 | 
|                        | Less accumulated depreciation and amortization |                                                                             |                      | (134,871 | )      |         |   | (123,805 | )     
|                        |                                                |                                                                             |                      |          |        |         |   |         
|                        |                                                |                                                                             | Property, net        |          |        | 105,047 |   |          |        | 107,031 | 
|                        |                                                |                                                                             |                      |          |        |         |   |         
|OTHER LONG-TERM ASSETS: |                                                |                                                                             |                      |          |        |         |   |         
|                        | Investments                                    |                                                                             |                      | 958      |        |         |   | 1,665    |       
|                        | Deferred tax asset                             |                                                                             |                      | 901      |        |         |   |         |       
|                        | Other assets                                   |                                                                             |                      | 5,649    |        |         |   | 4,906    |       
|                        |                                                |                                                                             |                      |          |        |         |   |         
|                        |                                                |                                                                             | TOTAL                |          | $      | 264,552 |   |          | $      | 278,208 | 
|                        |                                                |                                                                             |                      |          |        |         |   |         

See notes to consolidated financial statements.

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HYDRIL COMPANY

CONSOLIDATED BALANCE SHEETS

|                                        |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |         |       |         | 
|--------------------------------------- | --------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | ----- | ------- | - | ------- | ----- | ------- | 
|                                        |                                                                 |                                                                                                                                                                                      
|                                        |                                                                 | December 31,                                                                                                                                                                         
|                                        |                                                                 |                                                                                                                                                                                      
|                                        |                                                                 | 2003                                                                                                                                                                                  |                             | 2002   
|                                        |                                                                 |                                                                                                                                                                                       |                             |        
|                                        |                                                                 |                                                                                                                                                                                      
|                                        |                                                                 | (In thousands, except                                                                                                                                                                
|                                        |                                                                 | share and per share                                                                                                                                                                  
|                                        |                                                                 | information)                                                                                                                                                                         
|CURRENT LIABILITIES:                    |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        
|                                        | Accounts payable                                                |                                                                                                                                                                                       | $                           | 13,481  |       |         | $ | 13,723  |      
|                                        | Billings in excess of contract costs and
    estimated earnings |                                                                                                                                                                                       |                             | 487     |       |         |   | 4,981   |      
|                                        | Accrued liabilities                                             |                                                                                                                                                                                       |                             | 17,184  |       |         |   | 21,656  |      
|                                        | Current portion of long-term debt                               |                                                                                                                                                                                       |                             |        |       |         |   | 30,000  |      
|                                        | Income taxes payable                                            |                                                                                                                                                                                       |                             | 4,350   |       |         |   | 3,763   |      
|                                        |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        
|                                        |                                                                 |                                                                                                                                                                                       | Total current liabilities   |         |       | 35,502  |   |         |       | 74,123  | 
|                                        |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        
|LONG-TERM LIABILITIES:                  |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        
|                                        | Deferred tax liability                                          |                                                                                                                                                                                       |                             | 140     |       |         |   | 578     |      
|                                        | Other                                                           |                                                                                                                                                                                       |                             | 11,900  |       |         |   | 16,370  |      
|                                        |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        
|                                        |                                                                 |                                                                                                                                                                                       | Total long-term liabilities |         |       | 12,040  |   |         |       | 16,948  | 
|                                        |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        
|COMMITMENTS AND CONTINGENCIES (Note 11) |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        
|STOCKHOLDERS EQUITY:                   |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        
|                                        | Capital stock:                                                  |                                                                                                                                                                                       |                             |         |       |         |   |         |      
|                                        |                                                                 | Preferred stock  authorized,
    10,000,000 shares of $1 par value; none issued or
    outstanding                                                                                   |                             |         |       |         |   |         |       |        
|                                        |                                                                 | Common stock  authorized
    75,000,000 shares of $.50 par value; 16,058,792 and
    15,369,638 shares issued and outstanding at
    December 31, 2003 and 2002, respectively        |                             |         | 8,029 |         |   |         | 7,685 |        
|                                        |                                                                 | 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
    December 31, 2003 and 2002, respectively |                             |         | 3,379 |         |   |         | 3,596 |        
|                                        | Additional paid in capital                                      |                                                                                                                                                                                       |                             | 49,312  |       |         |   | 43,898  |      
|                                        | Retained earnings                                               |                                                                                                                                                                                       |                             | 160,059 |       |         |   | 134,481 |      
|                                        | Deferred compensation                                           |                                                                                                                                                                                       |                             | (1,801  | )     |         |   |        |      
|                                        | Accumulated other comprehensive loss                            |                                                                                                                                                                                       |                             | (1,968  | )     |         |   | (2,523  | )    
|                                        |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        
|                                        |                                                                 |                                                                                                                                                                                       | Total stockholders equity  |         |       | 217,010 |   |         |       | 187,137 | 
|                                        |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        
|                                        |                                                                 |                                                                                                                                                                                       | TOTAL                       |         | $     | 264,552 |   |         | $     | 278,208 | 
|                                        |                                                                 |                                                                                                                                                                                       |                             |         |       |         |   |        

See notes to consolidated financial statements.

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HYDRIL COMPANY

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                               |                            |                             |         |            |        |      |         |            |        |   |         |            |        | 
|---------------------------------------------- | -------------------------- | --------------------------- | ------- | ---------- | ------ | ---- | ------- | ---------- | ------ | - | ------- | ---------- | ------ | 
|                                               |                            |                            
|                                               |                            | Year Ended December 31,    
|                                               |                            |                            
|                                               |                            | 2003                        |         | 2002       |        | 2001
|                                               |                            |                             |         |            |        |     
|                                               |                            |                            
|                                               |                            | (In thousands, except share
|                                               |                            | and per share amounts)     
|REVENUE                                        |                            | $                           | 212,017 |            |        | $    | 241,524 |            |        | $ | 239,561 |           
|COST OF SALES                                  |                            |                             | 130,124 |            |        |      | 150,854 |            |        |   | 155,344 |           
|                                               |                            |                             |         |            |        |      |         |            |        |   |         |           
|GROSS PROFIT                                   |                            |                             | 81,893  |            |        |      | 90,670  |            |        |   | 84,217  |           
|                                               |                            |                             |         |            |        |      |         |            |        |   |         |           
|SELLING, GENERAL & ADMINISTRATION
    EXPENSES |                            |                             |         |            |        |      |         |            |        |   |         |           
|                                               | Engineering                |                             |         | 13,455     |        |      |         | 12,912     |        |   |         | 10,338     |       
|                                               | Sales and marketing        |                             |         | 16,287     |        |      |         | 16,773     |        |   |         | 15,174     |       
|                                               | General and administration |                             |         | 17,988     |        |      |         | 16,660     |        |   |         | 16,375     |       
|                                               |                            |                             |         |            |        |      |         |            |        |   |         |           
|                                               |                            | Total                       |         |            | 47,730 |      |         |            | 46,345 |   |         |            | 41,887 | 
|                                               |                            |                             |         |            |        |      |         |            |        |   |         |           
|OPERATING INCOME                               |                            |                             | 34,163  |            |        |      | 44,325  |            |        |   | 42,330  |           
|INTEREST EXPENSE                               |                            |                             | (1,101  | )          |        |      | (4,831  | )          |        |   | (4,403  | )         
|INTEREST INCOME                                |                            |                             | 724     |            |        |      | 1,477   |            |        |   | 2,874   |           
|OTHER EXPENSE, NET                             |                            |                             | (135    | )          |        |      | (214    | )          |        |   | (1,082  | )         
|                                               |                            |                             |         |            |        |      |         |            |        |   |         |           
|INCOME BEFORE INCOME TAXES                     |                            |                             | 33,651  |            |        |      | 40,757  |            |        |   | 39,719  |           
|PROVISION FOR INCOME TAXES                     |                            |                             | 8,073   |            |        |      | 14,265  |            |        |   | 14,100  |           
|                                               |                            |                             |         |            |        |      |         |            |        |   |         |           
|NET INCOME                                     |                            | $                           | 25,578  |            |        | $    | 26,492  |            |        | $ | 25,619  |           
|                                               |                            |                             |         |            |        |      |         |            |        |   |         |           
|INCOME PER SHARE:                              |                            |                             |         |            |        |      |         |            |        |   |         |           
|                                               | BASIC                      |                             | $       | 1.13       |        |      | $       | 1.18       |        |   | $       | 1.15       |       
|                                               | DILUTED                    |                             | $       | 1.11       |        |      | $       | 1.16       |        |   | $       | 1.13       |       
|WEIGHTED AVERAGE SHARES OUTSTANDING            |                            |                             |         |            |        |      |         |            |        |   |         |           
|                                               | BASIC                      |                             |         | 22,710,838 |        |      |         | 22,414,111 |        |   |         | 22,210,612 |       
|                                               | DILUTED                    |                             |         | 23,000,621 |        |      |         | 22,833,246 |        |   |         | 22,574,734 |       

See notes to consolidated financial statements.

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HYDRIL COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

For the Years Ended December 31, 2001,
2002 and 2003


|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |        |        | 
|----------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------ | ---------- | ------------ | - | ---------- | ----- | -------- | - | -------- | ---------- | ------------- | - | ------------ | ------ | ---- | - | ----- | ------ | - | - | - | ------- | ------ | ------ | - | ------ | - | - | - | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |     
|                                                                                          |                                      |                                      |            | Class B      |   |            |       |          |   |          |            | Accumulated   |   |             
|                                                                                          |                                      | Common Stock                         |            | Common Stock |   | Additional |       |          |   |          |            | Other         |   |             
|                                                                                          |                                      |                                      |            |              |   | Paid in    |       | Retained |   | Deferred |            | Comprehensive |   |             
|                                                                                          |                                      | Shares                               |            | Amount       |   | Shares     |       | Amount   |   | Capital  |            | Earnings      |   | Compensation |        | Loss |   | Total
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |      
|                                                                                          |                                      |                                     
|                                                                                          |                                      | (In thousands, except share amounts)
|Balance, December 31, 2000                                                                |                                      |                                      | 8,641,200  |              |   | $          | 4,321 |          |   |          | 13,410,908 |               |   | $            | 6,705  |      |   | $     | 38,333 |   |   | $ | 82,370  |        |        | $ |       |   |   | $ |       |        |        | $ | 131,729 |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|                                                                                          | Net Income                           |                                      |            |             |   |            | $     |         |   |          |            |              |   |              | $      |     |   |       | $      |  |   |   | $       | 25,619 |        |   | $      |  |   |   | $      |       |        |   | $       | 25,619 |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|                                                                                          |                                      | Total Comprehensive Income           |            |              |  |            |       |          |  |          |            |               |  |              |        |      |  |       |        |   |  |   |         |        | 25,619 |   |        |   |  |   |        |        |       |   |         |        | 25,619 | 
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|Shares sold by existing stockholders pursuant to
    a registration rights agreement      |                                      |                                      | 5,234,616  |              |   |            | 2,617 |          |   |          | (5,234,616 | )             |   |              | (2,617 | )    |   |       |       |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   |        |       
|Issuance of Common stock  employee
    stock purchase plan and exercise of stock options |                                      |                                      | 230,035    |              |   |            | 115   |          |   |          |           |               |   |              |       |      |   |       | 950    |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   | 1,065   |       
|Tax benefit on option exercises                                                           |                                      |                                      |           |              |   |            |      |          |   |          |           |               |   |              |       |      |   |       | 1,564  |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   | 1,564   |       
|Issuance of Class B Common stock 
    exercise of stock options                          |                                      |                                      |           |              |   |            |      |          |   |          | 43,857     |               |   |              | 22     |      |   |       | 186    |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   | 208     |       
|Conversion of Class B Common stock to Common
    stock                                    |                                      |                                      | 253,745    |              |   |            | 127   |          |   |          | (253,745   | )             |   |              | (127   | )    |   |       |       |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   |        |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|Balance, December 31, 2001                                                                |                                      |                                      | 14,359,596 |              |   | $          | 7,180 |          |   |          | 7,966,404  |               |   | $            | 3,983  |      |   | $     | 41,033 |   |   | $ | 107,989 |        |        | $ |       |   |   | $ |       |        |        | $ | 160,185 |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|                                                                                          | Net Income                           |                                      |            |             |   |            | $     |         |   |          |            |              |   |              | $      |     |   |       | $      |  |   |   | $       | 26,492 |        |   | $      |  |   |   | $      |       |        |   | $       | 26,492 |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|                                                                                          | Other Comprehensive Loss, net of tax |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |        |       
|                                                                                          | Minimum pension liability adjustment |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |  |   |   |        | (2,523 | )      |   |         | (2,523 | )     
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|                                                                                          |                                      | Total Comprehensive Income           |            |              |  |            |       |          |  |          |            |               |  |              |        |      |  |       |        |   |  |   |         |        | 26,492 |   |        |   |   |   |        |        | (2,523 | ) |         |        | 23,969 | 
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|Issuance of Common stock  employee
    stock purchase plan and exercise of stock options |                                      |                                      | 216,065    |              |   |            | 108   |          |   |          |           |               |   |              |       |      |   |       | 1,485  |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   | 1,593   |       
|Tax benefit on option exercises                                                           |                                      |                                      |           |              |   |            |      |          |   |          |           |               |   |              |       |      |   |       | 1,295  |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   | 1,295   |       
|Issuance of Class B Common stock 
    exercise of stock options                          |                                      |                                      |           |              |   |            |      |          |   |          | 20,000     |               |   |              | 10     |      |   |       | 85     |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   | 95      |       
|Conversion of Class B Common stock to Common
    stock                                    |                                      |                                      | 793,977    |              |   |            | 397   |          |   |          | (793,977   | )             |   |              | (397   | )    |   |       |       |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   |        |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|Balance, December 31, 2002                                                                |                                      |                                      | 15,369,638 |              |   | $          | 7,685 |          |   |          | 7,192,427  |               |   | $            | 3,596  |      |   | $     | 43,898 |   |   | $ | 134,481 |        |        | $ |       |   |   | $ | (2,523 | )      |        | $ | 187,137 |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|                                                                                          | Net Income                           |                                      |            |             |   |            | $     |         |   |          |            |              |   |              | $      |     |   |       | $      |  |   |   | $       | 25,578 |        |   | $      |  |   |   | $      |       |        |   | $       | 25,578 |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|                                                                                          | Other Comprehensive Loss, net of tax |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |        |       
|                                                                                          | Minimum pension liability adjustment |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |  |   |   |        | 555    |        |   |         | 555    |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|                                                                                          |                                      | Total Comprehensive Income           |            |              |  |            |       |          |  |          |            |               |  |              |        |      |  |       |        |   |  |   |         |        | 25,578 |   |        |   |  |   |        |        | 555    |   |         |        | 26,133 | 
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|Issuance of Common stock  employee
    stock purchase plan and exercise of stock options |                                      |                                      | 239,448    |              |   |            | 119   |          |   |          |           |               |   |              |       |      |   |       | 2,011  |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   | 2,130   |       
|Tax benefit on option exercises                                                           |                                      |                                      |           |              |   |            |      |          |   |          |           |               |   |              |       |      |   |       | 1,295  |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   | 1,295   |       
|Issuance of Class B Common stock 
    exercise of stock options                          |                                      |                                      |           |              |   |            |      |          |   |          | 15,000     |               |   |              | 8      |      |   |       | 64     |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   | 72      |       
|Conversion of Class B Common stock to Common
    stock                                    |                                      |                                      | 449,706    |              |   |            | 225   |          |   |          | (449,706   | )             |   |              | (225   | )    |   |       |       |   |   |   |        |        |        |   |       |   |   |   |       |        |        |   |        |       
|Awards of Restricted units/stock                                                          |                                      |                                      |           |              |   |            |      |          |   |          |           |               |   |              |       |      |   |       | 2,066  |   |   |   |        |        |        |   | (2,066 | ) |   |   |       |        |        |   |        |       
|Amortization of deferred compensation                                                     |                                      |                                      |           |              |   |            |      |          |   |          |           |               |   |              |       |      |   |       |       |   |   |   |        |        |        |   | 243    |   |   |   |       |        |        |   | 243     |       
|Forfeitures of restricted units                                                           |                                      |                                      |           |              |   |            |      |          |   |          |           |               |   |              |       |      |   |       | (22    | ) |   |   |        |        |        |   | 22     |   |   |   |       |        |        |   |        |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       
|Balance, December 31, 2003                                                                |                                      |                                      | 16,058,792 |              |   | $          | 8,029 |          |   |          | 6,757,721  |               |   | $            | 3,379  |      |   | $     | 49,312 |   |   | $ | 160,059 |        |        | $ | (1,801 | ) |   | $ | (1,968 | )      |        | $ | 217,010 |       
|                                                                                          |                                      |                                      |            |              |   |            |       |          |   |          |            |               |   |              |        |      |   |       |        |   |   |   |         |        |        |   |        |   |   |   |        |        |        |   |         |       

See notes to consolidated financial statements.

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##### Table of Contents



HYDRIL COMPANY

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |         |       |        |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                         |                                                                                       |                                                                
|                                                         |                                                                                       | Year Ended December 31,                                        
|                                                         |                                                                                       |                                                                
|                                                         |                                                                                       | 2003                                                            |                                                                 | 2002                                                    |        | 2001  
|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |       
|                                                         |                                                                                       |                                                                
|                                                         |                                                                                       | (In thousands)                                                 
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|                                                         | Net income                                                                            |                                                                 | $                                                               | 25,578                                                  |        |        | $       | 26,492  |        |        | $       | 25,619  |      
|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|                                                         | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |         |      
|                                                         |                                                                                       | Amortization of deferred compensation                           |                                                                 |                                                         | 243    |        |         |         |       |        |         |         |      |       
|                                                         |                                                                                       | Depreciation                                                    |                                                                 |                                                         | 11,900 |        |         |         | 10,827 |        |         |         | 9,207 |       
|                                                         |                                                                                       | Deferred income taxes                                           |                                                                 |                                                         | (1,539 | )      |         |         | 2,020  |        |         |         | 5,200 |       
|                                                         |                                                                                       | Provision for doubtful accounts                                 |                                                                 |                                                         | 236    |        |         |         | (136   | )      |         |         | 191   |       
|                                                         |                                                                                       | Gain on sale of real estate holdings not used in
    operations |                                                                 |                                                         | (104   | )      |         |         |       |        |         |         |      |       
|                                                         |                                                                                       | Change in operating assets and liabilities:                     |                                                                 |                                                         |        |        |         |         |        |        |         |         |       |       
|                                                         |                                                                                       |                                                                 | Receivables                                                     |                                                         |        | (1,175 | )       |         |        | 1,825  |         |         |       | 1,113  |        
|                                                         |                                                                                       |                                                                 | Contract costs and estimated earnings in excess
    of billings |                                                         |        | 463    |         |         |        | (4,829 | )       |         |       | 1,227  |        
|                                                         |                                                                                       |                                                                 | Inventories                                                     |                                                         |        | 5,068  |         |         |        | 7,393  |         |         |       | (8,730 | )      
|                                                         |                                                                                       |                                                                 | Other current and noncurrent assets                             |                                                         |        | 95     |         |         |        | (1,939 | )       |         |       | 1,515  |        
|                                                         |                                                                                       |                                                                 | Accounts payable                                                |                                                         |        | (242   | )       |         |        | (9,635 | )       |         |       | 828    |        
|                                                         |                                                                                       |                                                                 | Billings in excess of contract costs and
    estimated earnings |                                                         |        | (4,494 | )       |         |        | (7,660 | )       |         |       | 8,578  |        
|                                                         |                                                                                       |                                                                 | Accrued liabilities                                             |                                                         |        | (3,917 | )       |         |        | 1,867  |         |         |       | (707   | )      
|                                                         |                                                                                       |                                                                 | Income taxes payable                                            |                                                         |        | 587    |         |         |        | 1,314  |         |         |       | 1,052  |        
|                                                         |                                                                                       |                                                                 | Other long-term liabilities                                     |                                                         |        | (4,470 | )       |         |        | 795    |         |         |       | 26     |        
|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|                                                         |                                                                                       |                                                                 |                                                                 | Net cash provided by operating activities               |        |        | 28,229  |         |        |        | 28,334  |         |       |        | 45,119  |  
|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|NET CASH FROM INVESTING ACTIVITIES:                      |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|                                                         | Net proceeds (purchase) of held-to-maturity
    investments                           |                                                                 |                                                                 | 1,774                                                   |        |        |         | (9,564  | )      |        |         |        |      
|                                                         | Capital expenditures                                                                  |                                                                 |                                                                 | (8,558                                                  | )      |        |         | (17,928 | )      |        |         | (29,525 | )    
|                                                         | Other, net                                                                            |                                                                 |                                                                 | (1,097                                                  | )      |        |         |        |        |        |         |        |      
|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|                                                         |                                                                                       |                                                                 |                                                                 | Net cash used in investing activities                   |        |        | (7,881  | )       |        |        | (27,492 | )       |       |        | (29,525 | )
|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|NET CASH FROM FINANCING ACTIVITIES:                      |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|                                                         | Proceeds from borrowings                                                              |                                                                 |                                                                 |                                                        |        |        |         |        |        |        |         | 1,095   |      
|                                                         | Repayment of debt                                                                     |                                                                 |                                                                 | (30,000                                                 | )      |        |         | (30,234 | )      |        |         | (1,628  | )    
|                                                         | Repayment of capital leases                                                           |                                                                 |                                                                 |                                                        |        |        |         | (52     | )      |        |         | (267    | )    
|                                                         | Net proceeds from issuance of common stock                                            |                                                                 |                                                                 | 230                                                     |        |        |         | 185     |        |        |         | 86      |      
|                                                         | Net proceeds from exercise of stock options                                           |                                                                 |                                                                 | 1,971                                                   |        |        |         | 1,503   |        |        |         | 1,187   |      
|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|                                                         |                                                                                       |                                                                 |                                                                 | Net cash provided by (used in) financing
    activities |        |        | (27,799 | )       |        |        | (28,598 | )       |       |        | 473     |  
|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS |                                                                                       |                                                                 | (7,451                                                          | )                                                       |        |        | (27,756 | )       |        |        | 16,067  |        
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD         |                                                                                       |                                                                 | 61,590                                                          |                                                         |        |        | 89,346  |         |        |        | 73,279  |        
|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|CASH AND CASH EQUIVALENTS AT END OF PERIOD               |                                                                                       | $                                                               | 54,139                                                          |                                                         |        | $      | 61,590  |         |        | $      | 89,346  |        
|                                                         |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        |                                                                                       |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |        
|                                                         | Interest paid                                                                         |                                                                 | $                                                               | 1,044                                                   |        |        | $       | 4,700   |        |        | $       | 4,247   |      
|                                                         | Income taxes paid:                                                                    |                                                                 |                                                                 |                                                         |        |        |         |         |        |        |         |         |      
|                                                         |                                                                                       | Domestic                                                        |                                                                 |                                                         |       |        |         |         | 2,043  |        |         |         | 474   |       
|                                                         |                                                                                       | Foreign                                                         |                                                                 |                                                         | 7,685  |        |         |         | 6,715  |        |         |         | 5,252 |       

See notes to consolidated financial statements.

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##### Table of Contents



HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies

Nature of
Operations Hydril Company
(the Company) operates principally in the oilfield
equipment industry on a worldwide basis. Operations involve
engineering, manufacturing and marketing high performance
specialty equipment for use in the exploration and production of
oil and gas. The Companys customer base consists primarily
of steel pipe distributors, major oil companies, independent oil
and gas producers and drilling contractors. The Company operates
in two business segments  Premium Connection and
Pressure Control (see Note 14 for further information).

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
expense during the reporting period. Actual results could differ
from those estimates.

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 is
generally contracts from six to eighteen months and an estimated
contract price in excess of $1,000,000, are 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. Revenue from long-term contracts was approximately 13%,
16% and 8% of total revenue for the years ended
December 31, 2003, 2002 and 2001, respectively.

Cash and Cash
Equivalents Cash
equivalents are highly liquid investments including commercial
paper, time deposits and money market mutual funds having
original maturities of three months or less.

Investments
The Company has investment securities classified as
held-to-maturity and measured at amortized cost in
accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
Management has the positive intent and ability to hold those
securities to maturity. As of December 31, 2003 and 2002,
the Company held $7,789,000 and $9,564,000, respectively of
corporate investment securities. Contractual maturities of these
securities at December 31, 2003 include $6,831,000 which
mature in 2004 and $958,000 which mature in 2005. The fair value
of these securities as of December 31, 2003 and 2002
approximates the carrying value.

43



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Allowance for Doubtful
Accounts The Company
maintains an allowance for doubtful accounts based on its best
estimate of accounts receivable considered to be uncollectible.
An analysis of the activity in the allowance for doubtful
accounts for the years ended December 31, 2003, 2002 and
2001 is as follows:

|                             |  |                |       |      |  |      |       |   |  |   |        |  
|---------------------------- |  | -------------- | ----- | ---- |  | ---- | ----- | - |  | - | ------ | -
|                             |  | 2003           |       | 2002 |  | 2001
|                             |  |                |       |      |  |     
|                             |  |               
|                             |  | (In thousands)
|Beginning balance            |  | $              | 1,039 |      |  | $    | 1,332 |   |  | $ | 2,706  |  
|Additions charged to expense |  |                | 141   |      |  |      | 289   |   |  |   | 191    |  
|Accounts written off         |  |                | (45   | )    |  |      | (103  | ) |  |   | (1,125 | )
|Other adjustments            |  |                | (8    | )    |  |      | (479  | ) |  |   | (440   | )
|                             |  |                |       |      |  |      |       |   |  |   |        |  
|Ending balance               |  | $              | 1,127 |      |  | $    | 1,039 |   |  | $ | 1,332  |  
|                             |  |                |       |      |  |      |       |   |  |   |        |  

Other adjustments consist primarily of the
collection of a customers account previously determined as
doubtful for collection, and other adjustments reflecting
current economic conditions.

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 (LIFO) method
for substantially all pressure control products (approximately
80% and 81% of total gross inventories at December 31, 2003
and 2002, respectively) and by the first-in, first-out
(FIFO) method for all other inventories. If the FIFO
method had been used to value all inventories, the cost would
have been $13,369,000, $13,263,000 and $12,083,000 higher at
December 31, 2003, 2002 and 2001, respectively.

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. An analysis of the excess
and obsolete inventory reserve for the years ended
December 31, 2003, 2002 and 2001 is as follows:

|                                            |                |                |       |        |  |      |        |       |  |   |        |       | 
|------------------------------------------- | -------------- | -------------- | ----- | ------ |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                            |                | 2003           |       | 2002   |  | 2001
|                                            |                |                |       |        |  |     
|                                            |                |               
|                                            |                | (In thousands)
|Beginning balance                           |                | $              | 7,727 |        |  | $    | 8,045  |       |  | $ | 6,387  |      
|Provision for excess and obsolete inventory |                |                | 4,022 |        |  |      | 3,873  |       |  |   | 3,814  |      
|Inventory disposed of during the year       |                |                | (646  | )      |  |      | (4,191 | )     |  |   | (2,156 | )    
|                                            |                |                |       |        |  |      |        |       |  |   |        |      
|                                            | Ending balance |                | $     | 11,103 |  |      | $      | 7,727 |  |   | $      | 8,045 | 
|                                            |                |                |       |        |  |      |        |       |  |   |        |      

Property
Property, plant and equipment is recorded at cost. Expenditures
for renewals, replacements and improvements are capitalized.
Maintenance and repairs are charged to operating expenses as
incurred. Depreciation of property, including that under capital
leases, is based on the straight-line method. Rates are based
upon the estimated useful lives of the various classes of
property, generally as follows:

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

Upon retirement or other disposal of fixed
assets, the costs and related accumulated depreciation are
removed from the respective accounts and any gains or losses are
included in the results of operations.

Included in other assets within the consolidated
balance sheets at December 31, 2003 and 2002 are $2,173,000
and $2,641,000 respectively, of real estate holdings. These
holdings are composed of land and buildings in the United States
not currently used in operations, which may be sold if prices
acceptable to the Company can be obtained. Such holdings are
reported at the lower of their carrying amount or fair value
less estimated costs to sell.

44



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Impairment of Long-Lived
Assets The Company reviews
its long-lived assets for impairment when circumstances indicate
that the carrying amount of an asset may not be recoverable. The
determination of recoverability is made based upon the estimated
undiscounted future cash flows of the related asset. If the sum
of the future undiscounted cash flows is less than the carrying
amount of the asset, the amount of the impairment loss is
measured as the excess of the carrying amount over the fair
value of the asset.

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 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.

Research and Development
Costs The Company engages
in research and development activities to develop new products
and to significantly improve existing products. The Company
expenses as incurred all research and development costs that are
not reimbursable by other parties. Research and development
expenses, net of reimbursement, were $3,939,000, $3,906,000 and
$2,115,000, for the years ended December 31, 2003, 2002 and
2001, respectively.

Stock-Based
Compensation 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, compensation cost for stock
options is measured as the excess, if any, of the quoted market
price of the Companys common stock at the date of grant
over the amount an employee must pay to acquire the common stock.

Environmental
Liabilities The costs to
remediate and monitor environmental matters are accrued when
such liabilities are considered probable and a reasonable
estimate of such costs is determinable.

Income
Taxes The Company follows
the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the
future tax consequences of (i) temporary differences
between the tax bases of assets and liabilities and their
reported amounts in the financial statements and
(ii) operating loss and tax credit carryforwards for tax
purposes. Deferred tax assets are reduced by a valuation
allowance when, based upon managements estimates, it is
more likely than not that a portion of the deferred tax assets
will not be realized in a future period. United States deferred
income taxes have been provided on unremitted earnings of
foreign subsidiaries.

Foreign Currencies
Translation The
Companys foreign operations are closely integrated with
and are extensions of the Companys U.S. operations.
Accordingly, the U.S. dollar is the functional currency for
all of the Companys foreign operations. Inventory,
property, plant and equipment, cost of sales and depreciation
are remeasured from the local currency to U.S. dollars at
historical exchange rates. Monetary assets and liabilities are
remeasured at current exchange rates on the balance sheet date.
Income and expense accounts, other than cost of sales and
depreciation, are remeasured at weighted average exchange rates
during the year. Gains and losses resulting from those
remeasurements are included in the statements of operations.

Concentration of Credit and Customer
Risk The Company sells its
products to steel pipe distributors, major and independent
domestic and international oil and gas companies and national
oil companies, as well as domestic and international drilling
contractors and rental companies. See Note 14 for further
information on major customers. The Company performs ongoing
credit evaluations of its customers and provides allowance for
probable credit losses where necessary.

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

45



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                        
|-- | -------------------------------------------------------
|2. | Accrued Liabilities and Other Long-Term
    Liabilities

Accrued liabilities and other long-term
liabilities as of December 31, 2003 and 2002 consisted of
the following:

|                             |                                          |                |   |       |        |  |   |       |        | 
|---------------------------- | ---------------------------------------- | -------------- | - | ----- | ------ |  | - | ----- | ------ | 
|                             |                                          |               
|                             |                                          | December 31,  
|                             |                                          |               
|                             |                                          | 2003           |   | 2002 
|                             |                                          |                |   |      
|                             |                                          |               
|                             |                                          | (In thousands)
|Accrued liabilities:         |                                          |                |   |       |        |  |   |      
|                             | Accrued payroll, bonus and related       |                | $ | 3,904 |        |  | $ | 5,277 |       
|                             | Employee benefits                        |                |   | 3,272 |        |  |   | 5,858 |       
|                             | Product warranties                       |                |   | 2,192 |        |  |   | 3,274 |       
|                             | Taxes (property, sales, payroll, other)  |                |   | 4,479 |        |  |   | 4,586 |       
|                             | Other                                    |                |   | 3,337 |        |  |   | 2,661 |       
|                             |                                          |                |   |       |        |  |   |      
|                             |                                          | Total          |   | $     | 17,184 |  |   | $     | 21,656 | 
|                             |                                          |                |   |       |        |  |   |      
|Other long-term liabilities: |                                          |                |   |       |        |  |   |      
|                             | Post retirement health and life benefits |                | $ | 8,695 |        |  | $ | 9,122 |       
|                             | Pension plan benefits                    |                |   | 871   |        |  |   | 6,100 |       
|                             | Deferred compensation                    |                |   | 2,334 |        |  |   | 1,148 |       
|                             |                                          |                |   |       |        |  |   |      
|                             |                                          | Total          |   | $     | 11,900 |  |   | $     | 16,370 | 
|                             |                                          |                |   |       |        |  |   |      

The changes in the aggregate product warranty
liability is as follows for the years ended December 31:

|                                       |  |                |        |      |  |      |       |   |  |   |        |  
|-------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                       |  | 2003           |        | 2002 |  | 2001
|                                       |  |                |        |      |  |     
|                                       |  |               
|                                       |  | (In thousands)
|Beginning balance                      |  | $              | 3,274  |      |  | $    | 3,224 |   |  | $ | 3,934  |  
|Claims paid                            |  |                | (1,337 | )    |  |      | (690  | ) |  |   | (3,744 | )
|Additional warranty charged to expense |  |                | 255    |      |  |      | 740   |   |  |   | 3,034  |  
|                                       |  |                |        |      |  |      |       |   |  |   |        |  
|Ending balance                         |  | $              | 2,192  |      |  | $    | 3,274 |   |  | $ | 3,224  |  
|                                       |  |                |        |      |  |      |       |   |  |   |        |  



|   |                    
|-- | -------------------
|3. | Long-Term Contracts

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

|                                                                              |       |                |         |       |  |   |         |      |  
|----------------------------------------------------------------------------- | ----- | -------------- | ------- | ----- |  | - | ------- | ---- | -
|                                                                              |       |               
|                                                                              |       | December 31,  
|                                                                              |       |               
|                                                                              |       | 2003           |         | 2002 
|                                                                              |       |                |         |      
|                                                                              |       |               
|                                                                              |       | (In thousands)
|Costs and estimated earnings on uncompleted
    contracts                     |       | $              | 34,682  |       |  | $ | 48,417  |     
|Less: billings to date                                                        |       |                | (30,803 | )     |  |   | (48,569 | )   
|                                                                              |       |                |         |       |  |   |         |     
|Excess of billings over costs and estimated
    earnings                      |       | $              | 3,879   |       |  | $ | (152    | )   
|                                                                              |       |                |         |       |  |   |         |     
|Included in the accompanying balance sheets under
    the following captions: |       |                |         |       |  |   |         |     
|Contract costs and estimated earnings in excess
    of billings               |       | $              | 4,366   |       |  | $ | 4,829   |     
|Billings in excess of contract costs and
    estimated earnings               |       |                | (487    | )     |  |   | (4,981  | )   
|                                                                              |       |                |         |       |  |   |         |     
|                                                                              | Total |                | $       | 3,879 |  |   | $       | (152 | )
|                                                                              |       |                |         |       |  |   |         |     

46



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |               
|-- | --------------
|4. | Long-Term Debt

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

|                     |                      |                |   |      |  |   |         |   | 
|-------------------- | -------------------- | -------------- | - | ---- |  | - | ------- | - | 
|                     |                      |               
|                     |                      | December 31,  
|                     |                      |               
|                     |                      | 2003           |   | 2002
|                     |                      |                |   |     
|                     |                      |               
|                     |                      | (In thousands)
|Senior notes         |                      | $              |  |      |  | $ | 30,000  |  
|Less current portion |                      |                |  |      |  |   | (30,000 | )
|                     |                      |                |   |      |  |   |         |  
|                     | Total long-term debt |                | $ |     |  |   | $       |  | 
|                     |                      |                |   |      |  |   |         |  

Senior
Notes in June 1998, the
Company issued $60,000,000 of 6.85% senior notes due
June 30, 2003. During 2002, the Company prepaid $30,000,000
of the aggregate principal amount of the unsecured notes plus a
make-whole premium of $1,215,000 relating to this prepayment.
The make-whole premium was included as interest expense in the
consolidated statement of operations. The Company repaid the
remaining $30,000,000 at maturity on June 30, 2003.

Revolving Lines of
Credit At
December 31, 2003, the Company had available $20,000,000 in
total 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.
Effective June 30, 2003, the Company entered into a new
domestic line of credit to replace its expiring facility. The
new facility provides for $15,000,000 in committed unsecured
revolving credit through June 30, 2005. 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
December 31, 2003, there were no outstanding borrowings
under this credit facility.

Additionally, effective June 30, 2003 the
Company amended its $5,000,000 committed unsecured foreign line
of credit to, among other things, extend the maturity to
June 30, 2005. 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 December 31, 2003, there were no
outstanding borrowings under this facility.

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
December 31, 2003 there was approximately $336,000
outstanding in letters of credit.

Covenants
The U.S. revolving line of credit requires the Company to
comply with certain covenants and financial tests. The financial
covenants under the line of credit consist of a requirement to
maintain minimum levels of tangible net worth, to not exceed
levels of debt specified in the agreement, to comply with a
fixed coverage test and to not exceed a maximum leverage ratio.
The foreign line of credit 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. At December 31, 2003, the Company was in compliance
with these covenants.

47



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |             
|-- | ------------
|5. | Income Taxes

The geographical sources of income before income
taxes for the years ended December 31, 2003, 2002 and 2001
were as follows:

|                           |  |                |        |      |  |      |        |  |  |   |        | 
|-------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                           |  | 2003           |        | 2002 |  | 2001
|                           |  |                |        |      |  |     
|                           |  |               
|                           |  | (In thousands)
|United States              |  | $              | 15,952 |      |  | $    | 16,337 |  |  | $ | 20,172 | 
|Foreign                    |  |                | 17,699 |      |  |      | 24,420 |  |  |   | 19,547 | 
|                           |  |                |        |      |  |      |        |  |  |   |        | 
|Income before income taxes |  | $              | 33,651 |      |  | $    | 40,757 |  |  | $ | 39,719 | 
|                           |  |                |        |      |  |      |        |  |  |   |        | 

The provision (benefit) for income taxes for the
years ended December 31, 2003, 2002 and 2001 consisted of
the following:

|               |          |                |   |        |       |      |   |       |        |  |   |       |        | 
|-------------- | -------- | -------------- | - | ------ | ----- | ---- | - | ----- | ------ |  | - | ----- | ------ | 
|               |          | 2003           |   | 2002   |       | 2001
|               |          |                |   |        |       |     
|               |          |               
|               |          | (In thousands)
|United States: |          |                |   |        |       |      |   |       |        |  |   |      
|               | Current  |                | $ | 3,959  |       |      | $ | 4,496 |        |  | $ | 2,732 |       
|               | Deferred |                |   | (1,945 | )     |      |   | 1,482 |        |  |   | 4,810 |       
|Foreign:       |          |                |   |        |       |      |   |       |        |  |   |      
|               | Current  |                |   | 5,653  |       |      |   | 7,749 |        |  |   | 6,168 |       
|               | Deferred |                |   | 406    |       |      |   | 538   |        |  |   | 390   |       
|               |          |                |   |        |       |      |   |       |        |  |   |      
|               |          | Total          |   | $      | 8,073 |      |   | $     | 14,265 |  |   | $     | 14,100 | 
|               |          |                |   |        |       |      |   |       |        |  |   |      

The consolidated effective income tax rates (as a
percentage of income before income taxes) for the years ended
December 31, 2003, 2002 and 2001 varies from the United
States statutory income tax rate for the reasons set forth below:

|                                        |                |      |       |      |   |      |      |      |   |  |      |      |  
|--------------------------------------- | -------------- | ---- | ----- | ---- | - | ---- | ---- | ---- | - |  | ---- | ---- | -
|                                        |                | 2003 |       | 2002 |   | 2001
|                                        |                |      |       |      |   |     
|Statutory rate                          |                |      | 35.0  | %    |   |      | 35.0 | %    |   |  | 35.0 | %   
|Nondeductible expenses                  |                |      | 0.2   | %    |   |      | 0.7  | %    |   |  | 0.2  | %   
|Research and experimentation tax credit |                |      | (11.0 | )%   |   |      |     |      |   |  |     |     
|Other                                   |                |      | (0.2  | )%   |   |      | (0.7 | )%   |   |  | 0.3  | %   
|                                        |                |      |       |      |   |      |      |      |   |  |      |     
|                                        | Effective Rate |      |       | 24.0 | % |      |      | 35.0 | % |  |      | 35.5 | %
|                                        |                |      |       |      |   |      |      |      |   |  |      |     

48



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred income taxes reflect the net tax effects
of temporary differences between the amounts of assets and
liabilities for accounting purposes and the amounts used for
income tax purposes. Significant components of the
Companys deferred tax assets and liabilities as of
December 31, 2003 and 2002 were as follows:

|                          |                                                                      |                              |       |        |        |   |       |        |         |  
|------------------------- | -------------------------------------------------------------------- | ---------------------------- | ----- | ------ | ------ | - | ----- | ------ | ------- | -
|                          |                                                                      | 2003                         |       | 2002  
|                          |                                                                      |                              |       |       
|                          |                                                                      |                             
|                          |                                                                      | (In thousands)              
|Deferred tax assets:      |                                                                      |                              |       |        |        |   |       |       
|                          | Inventory capitalization cost                                        |                              | $     | 2,886  |        |   | $     | 4,086  |        
|                          | Accrued expenses and other items not deductible
    for tax purposes |                              |       | 8,124  |        |   |       | 10,105 |        
|                          | Alternative minimum tax and research credits                         |                              |       | 2,893  |        |   |       |       |        
|                          | Foreign tax credits                                                  |                              |       |       |        |   |       | 4,833  |        
|                          | Other                                                                |                              |       | 1,945  |        |   |       | 1,404  |        
|                          |                                                                      |                              |       |        |        |   |       |       
|                          |                                                                      | Total deferred tax assets    |       |        | 15,848 |   |       |        | 20,428  |  
|Deferred tax liabilities: |                                                                      |                              |       |        |        |   |       |       
|                          | Property, plant and equipment                                        |                              |       | (5,848 | )      |   |       | (4,280 | )      
|                          | Unrepatriated foreign earnings and other foreign
    deferred taxes  |                              |       | (144   | )      |   |       | (7,562 | )      
|                          |                                                                      |                              |       |        |        |   |       |       
|                          |                                                                      | Total deferred tax liability |       |        | (5,992 | ) |       |        | (11,842 | )
|                          |                                                                      |                              |       |        |        |   |       |       
|Net deferred tax asset    |                                                                      | $                            | 9,856 |        |        | $ | 8,586 |       
|                          |                                                                      |                              |       |        |        |   |       |       

During the third quarter of 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 2003.



|   |                  
|-- | -----------------
|6. | Employee Benefits

Post Retirement
Benefits The Company has a
defined benefit pension plan covering substantially all of its
U.S. employees. Benefits are based on the employees
years of service and compensation. Plan assets consist primarily
of investments in equities and money market funds. Effective
December 31, 2001, this plan was frozen. No additional
benefits are being accrued under this plan. Beginning
January 1, 2002, the Company initiated a new retirement
contribution plan to replace the previous plan covering
substantially all of its U.S. employees. The new retirement
contribution plan is discussed below under Defined Contribution
Plan.

Additionally, the Company provides certain
medical, life insurance and/or dental benefits for eligible
employees, hired before December 31, 1989, who have or will
retire under one of the Companys pension plans.

49



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The benefit obligation, value of plan assets, and
funded status component costs of the plans are as follows:

|                                               |                                   |                                          |        |                 |        |                 |        |        |        |   |       |        |        |   |       |        |        |  
|---------------------------------------------- | --------------------------------- | ---------------------------------------- | ------ | --------------- | ------ | --------------- | ------ | ------ | ------ | - | ----- | ------ | ------ | - | ----- | ------ | ------ | -
|                                               |                                   |                                          |        |                 |        |                
|                                               |                                   |                                          |        |                 |        | Post Retirement
|                                               |                                   |                                          |        | Health and Life
|                                               |                                   | Defined Benefit Plan                     |        | Benefits       
|                                               |                                   |                                          |        |                
|                                               |                                   | 2003                                     |        | 2002            |        | 2003            |        | 2002  
|                                               |                                   |                                          |        |                 |        |                 |        |       
|                                               |                                   |                                         
|                                               |                                   | (In thousands)                          
|Change in benefit obligation:                  |                                   |                                          |        |                 |        |                 |        |        |        |   |       |        |        |   |       |       
|Benefit obligation at beginning of year        |                                   | $                                        | 27,068 |                 |        | $               | 24,459 |        |        | $ | 7,649 |        |        | $ | 6,709 |       
|                                               | Service cost                      |                                          |        |                |        |                 |        |       |        |   |       | 56     |        |   |       | 59     |       
|                                               | Interest cost                     |                                          |        | 1,747           |        |                 |        | 1,662  |        |   |       | 403    |        |   |       | 497    |       
|                                               | Participant contributions         |                                          |        |                |        |                 |        |       |        |   |       | 61     |        |   |       | 55     |       
|                                               | Plan amendments                   |                                          |        |                |        |                 |        | 167    |        |   |       |       |        |   |       |       |       
|                                               | Benefits paid                     |                                          |        | (592            | )      |                 |        | (522   | )      |   |       | (738   | )      |   |       | (855   | )     
|                                               | Actuarial (gain)/loss             |                                          |        | 2,366           |        |                 |        | 1,302  |        |   |       | (529   | )      |   |       | 1,184  |       
|                                               |                                   |                                          |        |                 |        |                 |        |        |        |   |       |        |        |   |       |       
|                                               |                                   | Benefit obligation at end of year        |        | $               | 30,589 |                 |        | $      | 27,068 |   |       | $      | 6,902  |   |       | $      | 7,649  |  
|                                               |                                   |                                          |        |                 |        |                 |        |        |        |   |       |        |        |   |       |       
|Change in plan Assets:                         |                                   |                                          |        |                 |        |                 |        |        |        |   |       |        |        |   |       |       
|Fair value of plan assets at beginning of year |                                   | $                                        | 18,455 |                 |        | $               | 18,730 |        |        | $ |      |        |        | $ |      |       
|                                               | Actual return on plan assets      |                                          |        | 4,874           |        |                 |        | (1,382 | )      |   |       |       |        |   |       |       |       
|                                               | Employer contributions            |                                          |        | 7,000           |        |                 |        | 1,650  |        |   |       | 677    |        |   |       | 800    |       
|                                               | Participant contributions         |                                          |        |                |        |                 |        |       |        |   |       | 61     |        |   |       | 55     |       
|                                               | Benefits paid                     |                                          |        | (592            | )      |                 |        | (522   | )      |   |       | (738   | )      |   |       | (855   | )     
|                                               | Administrative expenses           |                                          |        | (27             | )      |                 |        | (21    | )      |   |       |       |        |   |       |       |       
|                                               |                                   |                                          |        |                 |        |                 |        |        |        |   |       |        |        |   |       |       
|                                               |                                   | Fair value of plan assets at end of year |        | $               | 29,710 |                 |        | $      | 18,455 |   |       | $      |       |   |       | $      |       |  
|                                               |                                   |                                          |        |                 |        |                 |        |        |        |   |       |        |        |   |       |       
|Reconciliation of plan funded status:          |                                   |                                          |        |                 |        |                 |        |        |        |   |       |        |        |   |       |       
|                                               | Funded status                     |                                          | $      | (879            | )      |                 | $      | (8,614 | )      |   | $     | (6,902 | )      |   | $     | (7,649 | )     
|                                               | Unrecognized actuarial loss       |                                          |        |                |        |                 |        |       |        |   |       | 612    |        |   |       | 1,142  |       
|                                               | Unamortized prior service benefit |                                          |        |                |        |                 |        |       |        |   |       | (2,626 | )      |   |       | (3,115 | )     
|                                               |                                   |                                          |        |                 |        |                 |        |        |        |   |       |        |        |   |       |       
|                                               |                                   | Net amount recognized at year-end        |        | $               | (879   | )               |        | $      | (8,614 | ) |       | $      | (8,916 | ) |       | $      | (9,622 | )
|                                               |                                   |                                          |        |                 |        |                 |        |        |        |   |       |        |        |   |       |       

50



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                             |                                              |                      |   |                          |     |      |   |        |     |      |   |        |       |  |   |      |     |   |   |      |    |  |   |      |    | 
|-------------------------------------------- | -------------------------------------------- | -------------------- | - | ------------------------ | --- | ---- | - | ------ | --- | ---- | - | ------ | ----- |  | - | ---- | --- | - | - | ---- | -- |  | - | ---- | -- | 
|                                             |                                              |                      |   |                          |     |      |   |       
|                                             |                                              |                      |   | Post Retirement         
|                                             |                                              | Defined Benefit Plan |   | Health and Life Benefits
|                                             |                                              |                      |   |                         
|                                             |                                              | 2003                 |   | 2002                     |     | 2001 |   | 2003   |     | 2002 |   | 2001  
|                                             |                                              |                      |   |                          |     |      |   |        |     |      |   |       
|                                             |                                              |                     
|                                             |                                              | (In thousands)      
|Components of net periodic benefit cost      |                                              |                      |   |                          |     |      |   |        |     |      |   |        |       |  |   |      |     |   |   |      |    |  |   |     
|                                             | Service cost                                 |                      | $ |                         |     |      | $ |       |     |      | $ | 1,342  |       |  | $ | 56   |     |   | $ | 58   |    |  | $ | 55   |   
|                                             | Interest cost                                |                      |   | 1,747                    |     |      |   | 1,662  |     |      |   | 1,766  |       |  |   | 403  |     |   |   | 497  |    |  |   | 463  |   
|                                             | Expected return on plan assets               |                      |   | (1,755                   | )   |      |   | (1,525 | )   |      |   | (1,588 | )     |  |   |     |     |   |   |     |    |  |   |     |   
|                                             | Amortization of prior service cost (benefit) |                      |   | 16                       |     |      |   | 16     |     |      |   | (9     | )     |  |   | (488 | )   |   |   | (488 | )  |  |   | (488 | ) 
|                                             | Amortization of net loss                     |                      |   | 129                      |     |      |   |       |     |      |   |       |       |  |   |     |     |   |   |     |    |  |   |     |   
|                                             | Amortization of transition obligation        |                      |   |                         |     |      |   |       |     |      |   | 193    |       |  |   |     |     |   |   |     |    |  |   |     |   
|                                             |                                              |                      |   |                          |     |      |   |        |     |      |   |        |       |  |   |      |     |   |   |      |    |  |   |     
|                                             |                                              | Net periodic cost    |   | $                        | 137 |      |   | $      | 153 |      |   | $      | 1,704 |  |   | $    | (29 | ) |   | $    | 67 |  |   | $    | 30 | 
|                                             |                                              |                      |   |                          |     |      |   |        |     |      |   |        |       |  |   |      |     |   |   |      |    |  |   |     
|Additional loss (benefit) recognized due to: |                                              |                      |   |                          |     |      |   |        |     |      |   |        |       |  |   |      |     |   |   |      |    |  |   |     
|                                             | Curtailment                                  |                      | $ |                         |     |      | $ |       |     |      | $ | 185    |       |  | $ |     |     |   | $ |     |    |  | $ |     |   
|                                             |                                              |                      |   |                          |     |      |   |        |     |      |   |        |       |  |   |      |     |   |   |      |    |  |   |     

The Companys pension plan weighted average
asset allocations at December 31, 2003 and 2002, by asset
category are as follows:

|                          |              |              |  |      |     |  |  |    |     | 
|------------------------- | ------------ | ------------ |  | ---- | --- |  |  | -- | --- | 
|                          |              |             
|                          |              | Defined     
|                          |              | Benefit Plan
|                          |              |             
|                          |              | 2003         |  | 2002
|                          |              |              |  |     
|Percentage of Plan Assets |              |              |  |      |     |  |  |   
|                          | Equity       |              |  | 66   |     |  |  | 53 |    
|                          | Fixed income |              |  | 34   |     |  |  | 47 |    
|                          |              |              |  |      |     |  |  |   
|                          |              | Total        |  |      | 100 |  |  |    | 100 | 
|                          |              |              |  |      |     |  |  |   

The amounts recognized in the consolidated
balance sheet are as follows:

|                                             |  |                      |       |      |  |   |        |  
|-------------------------------------------- |  | -------------------- | ----- | ---- |  | - | ------ | -
|                                             |  |                     
|                                             |  | Defined Benefit Plan
|                                             |  |                     
|                                             |  | 2003                 |       | 2002
|                                             |  |                      |       |     
|                                             |  |                     
|                                             |  | (In thousands)      
|Accrued benefit liability                    |  | $                    | (879  | )    |  | $ | (8,614 | )
|Intangible asset                             |  |                      | 136   |      |  |   | 152    |  
|Accumulated other comprehensive income       |  |                      | 3,027 |      |  |   | 3,882  |  
|                                             |  |                      |       |      |  |   |        |  
|Net amount recognized at the end of the year |  | $                    | 2,284 |      |  | $ | (4,580 | )
|                                             |  |                      |       |      |  |   |        |  

The additional year-end information for plans
with accumulated benefit obligations in excess of plan assets
are as follows:

|                                         |  |                      |        |      |  |   |        | 
|---------------------------------------- |  | -------------------- | ------ | ---- |  | - | ------ | 
|                                         |  |                     
|                                         |  | Defined Benefit Plan
|                                         |  |                     
|                                         |  | 2003                 |        | 2002
|                                         |  |                      |        |     
|                                         |  |                     
|                                         |  | (In thousands)      
|Projected benefit obligation             |  | $                    | 30,589 |      |  | $ | 27,068 | 
|Accumulated benefit obligation           |  |                      | 30,589 |      |  |   | 27,068 | 
|Fair value of plan assets at end of year |  |                      | 29,710 |      |  |   | 18,455 | 

The assumed discount rate used in determining the
benefit obligation was 6.0%, 6.5% and 6.75% at December 31,
2003, 2002 and 2001, respectively. The expected long-term rate
of return on pension plan assets

51



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

at December 31, 2003, 2002 and 2001 was 6%,
8% and 9%, respectively. Based on current expectations, the
Company does not plan to make any additional contributions to
its defined benefit pension plan during 2004.

A 12% annual rate of increase in the per capita
cost of both pre-age 65 and post-age 65 covered health
care benefits was assumed for 2003 in determining the benefit
obligation for the post retirement health and life plan. This
rate is assumed to decrease gradually to 5% for 2011 and remain
at that level thereafter.

The assumed health care cost trend rates have a
significant effect on the amounts reported for the post
retirement health and life plan. A one percent change in the
assumed health care cost trend rates would have the following
effects:

|                                                                     |  |                |     |          |  |   |      |  
|-------------------------------------------------------------------- |  | -------------- | --- | -------- |  | - | ---- | -
|                                                                     |  |               
|                                                                     |  | One Percent   
|                                                                     |  |               
|                                                                     |  | Increase       |     | Decrease
|                                                                     |  |                |     |         
|                                                                     |  |               
|                                                                     |  | (In thousands)
|Effect on total of service and interest cost
    components for 2003 |  | $              | 6   |          |  | $ | (6   | )
|Effect on December 31, 2003 benefit
    obligation                   |  |                | 113 |          |  |   | (107 | )

Defined Contribution
Plans The Company has an
employee savings plan under which U.S. employees can invest
up to $12,000 of their earnings pre-tax, matched by an amount
from the Company equal to one-half of the first 6% of the
employees contributions. The Companys contributions
were $955,000, $918,000 and $859,000 in 2003, 2002 and 2001,
respectively.

Effective January 1, 2002, the Company
initiated a new defined contribution retirement plan, in which
the Company makes monthly contributions to a separate retirement
contribution account for each employee as an addition to the
savings plan discussed above. The contributions are a percentage
of compensation ranging from 2%-7% based on age. During 2003 and
2002, the Companys contributions were $1,784,000 and
$1,707,000, respectively.

Nonqualified Deferred Compensation
Arrangement Effective
April 1, 2001, the Company implemented the Hydril Company
Restoration Plan, a nonqualified, funded, deferred compensation
arrangement for a select group of management or highly
compensated employees. Under the terms of the Plan, participants
can defer up to 15% of their regular base pay and 100% of
bonuses that would otherwise be paid in cash. Additionally, the
Plan allows participants to retain the benefits to which they
would have been entitled under the Companys savings plan
except for the federally mandated limits on these benefits or on
the level of salary on which these benefits may be calculated.
The Company will make contributions to a rabbi trust to assist
in meeting the liabilities of the Plan. A rabbi trust sets aside
assets to pay for benefits under a nonqualified plan, but those
assets remain subject to claims of Hydrils general
creditors in preference to the claims of plan participants and
beneficiaries.

Other
Substantially all of the Companys employees in foreign
locations are covered by either governmental-sponsored or
Company-sponsored benefit plans. The aggregate liabilities and
expenses of these foreign plans are not material to the
consolidated financial statements.



|   |                     
|-- | --------------------
|7. | Stockholders Equity

Common
Stock The Companys
Restated Certificate of Incorporation authorizes the issuance of
up to 75,000,000 shares of common stock, par value
$.50 per share, and 32,000,000 shares of class B
common stock, par value $.50 per share. At
December 31, 2003 and 2002, 16,058,792 and
15,369,638 shares of common stock were issued and
outstanding, and 6,757,721 and 7,192,427 shares of
class B common stock were issued and outstanding,
respectively.

The holders of class B common stock are
entitled to ten votes per share and the holders of common stock
are entitled to one vote per share on all matters to be voted on
by the Companys stockholders generally, including the
election of directors. Holders of common stock have no
conversion rights while holders of class B

52



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

common stock may convert each share of
class B common stock into one share of common stock at any
time. In addition, shares of class B common stock
automatically convert into the same number of shares of common
stock if the shares of class B common stock are transferred
other than to a holder of class B common stock or a person
related to such a holder. All class B common stock will
convert into common stock if the outstanding shares of
class B common stock represent less than 10% of the
combined outstanding shares of class B common stock and
common stock.

Preferred
Stock The Companys
Restated Certificate of Incorporation authorizes the issuance of
up to 10,000,000 shares of preferred stock, par value
$1.00 per share. At December 31, 2003 and 2002, there
were no shares of preferred stock issued or outstanding.

Charter Amendment and Change to Capital
Stock In September 2000,
the Company amended its charter to increase the authorized
number of shares of common stock and preferred stock and create
class B common stock. As a result of the charter amendment,
each share of common stock then outstanding was automatically
converted into one share of class B common stock.
Concurrently, the Company also distributed five additional
shares of class B common stock for each outstanding share
of class B common stock.

All share and per share amounts in the
consolidated financial statements have been retroactively
restated for the increase in authorized shares of common stock
and preferred stock and the creation of class B common
stock, the conversion of outstanding common stock into
class B common stock and the five-for-one stock dividend of
class B common stock, which was accounted for as a stock
split.

Registration Rights
Agreement In connection
with the Companys initial public offering, the Company
entered into a registration rights agreement with stockholders
holding more than 5% of the Companys common stock prior to
the initial public offering. The registration rights agreement
provides such stockholders with, subject to defined
restrictions, certain demand, shelf and piggyback rights to
require the Company to register the sale of their common stock.
The Company is required to pay all expenses incident to its
performance or compliance with the registration rights agreement
except for underwriting commissions and discounts related to
shares of common stock sold by stockholders. The registration
rights agreement terminates April 2006. Pursuant to this
agreement, in May 2001, 5,234,616 shares of common stock
were sold to the public by certain existing stockholders at a
price of $26.50 per share pursuant to a registration
statement filed by the Company. The selling stockholders held
class B common stock which was converted into common stock
prior to being sold to the public. Hydril did not receive any
proceeds from this offering.

Rights
Agreement During 2002, the
Companys Board of Directors approved and the Company
entered into a Rights Agreement. Under the terms of the Rights
Agreement, the Company declared a dividend of one Right for each
outstanding share of the Companys common stock and
class B common stock to holders of record as of
April 12, 2002.

The Rights will trade with the Companys
common stock and class B common stock until exercisable.
The Rights would be triggered and exercisable ten
days following a public announcement that a person or group has
acquired 15% of the Companys common stock or voting rights
or ten business days after a person or group begins a tender
offer that would result in ownership of 15% of the
Companys common stock or voting rights. Once triggered,
the Rights would entitle the holders to purchase from the
Company a unit consisting of one one-hundredth of a share of
Series A Junior Participating Preferred Stock at a purchase
price of $100 per share or, upon the occurrence of certain
events, either the Companys common stock or shares of
common stock of an acquiring entity for a payment equal to half
of market value.

The Rights may be redeemed by the Company for
$.01 per Right at any time until an acquirer has acquired
the level of ownership that triggers the Rights
Plan. The Rights extend for ten years and will expire on
April 9, 2012.

53



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Employee Stock Purchase
Plan The Hydril Company
Employee Stock Purchase Plan (the Stock Purchase
Plan), was implemented November 1, 2000, and
220,000 shares of common stock have been reserved for this
plan. Under the Stock Purchase Plan, employees may purchase
shares of the Companys common stock at the lower of 85% of
market value at the closing price on the first or last business
day of each six-month period beginning on each July 1 and
January 1, except that the first offering period was an
eight-month period commencing on November 1, 2000 and
ending on June 30, 2001. Purchases are limited to 10% of
the employees regular pay. For the years ended
December 31, 2003 and 2002, 11,413 and 12,366 shares
respectively, were issued under this plan. In January 2004, an
additional 6,195 shares were issued for the offering period
June 2003 through December 2003.



|   |                         
|-- | ------------------------
|8. | Other Comprehensive Loss

SFAS 130 Reporting Comprehensive
Income requires minimum pension liability adjustments to
be included in other comprehensive income. At December 31,
2003 and 2002, the Company had an unfunded accumulated benefit
obligation in excess of the accrued pension expense.
Accordingly, for the years ended December 31, 2003 and
2002, ($555,000) and $2,523,000, respectively were recorded in
other comprehensive (income) loss net of income tax at a rate of
35%.



|   |                         
|-- | ------------------------
|9. | Other Income and Expense

Expenses Incurred Pursuant to Registration
Rights Agreement Other
expense for 2001 includes $570,000 in expenses incurred in
facilitating the offering of common stock by certain
stockholders of the Company in May 2001 (see Note 7).

Surplus Property
Expenses Other expense for
2003, 2002, and 2001 includes surplus property expenses of
$349,000, $360,000 and $518,000, respectively.



|    |                   
|--- | ------------------
|10. | 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.

54



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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the computation of
basic and diluted net income per share:

|                                         |  |                                      |        |          |  |           |        |  |  |   |      | 
|---------------------------------------- |  | ------------------------------------ | ------ | -------- |  | --------- | ------ |  |  | - | ---- | 
|                                         |  |                                      |        | Weighted |  | Net      
|                                         |  | Net                                  |        | Average  |  | Income   
|                                         |  | Income                               |        | Shares   |  | Per Share
|                                         |  |                                      |        |          |  |          
|                                         |  |                                     
|                                         |  | (In thousands except per share data)
|For the year ended December 31,
    2001 |  |                                      |        |          |  |           |        |  |  |   |      | 
|Basic net income                         |  | $                                    | 25,619 |          |  |           | 22,211 |  |  | $ | 1.15 | 
|Effect of dilutive stock options         |  |                                      |       |          |  |           | 364    |  |  |   |     | 
|                                         |  |                                      |        |          |  |           |        |  |  |   |      | 
|Diluted net income                       |  | $                                    | 25,619 |          |  |           | 22,575 |  |  | $ | 1.13 | 
|                                         |  |                                      |        |          |  |           |        |  |  |   |      | 
|For the year ended December 31,
    2002 |  |                                      |        |          |  |           |        |  |  |   |      | 
|Basic net income                         |  | $                                    | 26,492 |          |  |           | 22,414 |  |  | $ | 1.18 | 
|Effect of dilutive stock options         |  |                                      |       |          |  |           | 419    |  |  |   |     | 
|                                         |  |                                      |        |          |  |           |        |  |  |   |      | 
|Diluted net income                       |  | $                                    | 26,492 |          |  |           | 22,833 |  |  | $ | 1.16 | 
|                                         |  |                                      |        |          |  |           |        |  |  |   |      | 
|For the year ended December 31,
    2003 |  |                                      |        |          |  |           |        |  |  |   |      | 
|Basic net income                         |  | $                                    | 25,578 |          |  |           | 22,711 |  |  | $ | 1.13 | 
|Effect of dilutive stock options         |  |                                      |       |          |  |           | 290    |  |  |   |     | 
|                                         |  |                                      |        |          |  |           |        |  |  |   |      | 
|Diluted net income                       |  | $                                    | 25,578 |          |  |           | 23,001 |  |  | $ | 1.11 | 
|                                         |  |                                      |        |          |  |           |        |  |  |   |      | 



|    |                              
|--- | -----------------------------
|11. | Commitments and Contingencies

Leases
The Companys lease commitments are principally for
operating facilities, vehicles and equipment.

Obligations for minimum payments under
noncancelable operating leases for the years ended
December 31 are as follows:

|                        |                              |                |       |       | 
|----------------------- | ---------------------------- | -------------- | ----- | ----- | 
|                        |                              | Operating     
|                        |                              |               
|                        |                              | (In thousands)
|2004                    |                              | $              | 1,788 |      
|2005                    |                              |                | 1,151 |      
|2006                    |                              |                | 487   |      
|2007                    |                              |                | 128   |      
|2008                    |                              |                | 12    |      
|Greater than five years |                              |                |      |      
|                        |                              |                |       |      
|                        | Total minimum lease payments |                | $     | 3,566 | 
|                        |                              |                |       |      

Rental expense was $1,421,000, $1,500,000 and
$1,284,000, for the years ended December 31, 2003, 2002 and
2001, respectively.

Litigation
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 also 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.

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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                    
|--- | -----------------------------------
|12. | Fair Value of Financial Instruments

The Companys financial instruments at
December 31, 2003 and 2002 consisted of cash and cash
equivalents, short-term investments, accounts receivable, and
accounts payable. The carrying amounts of these items are a
reasonable estimate of their fair values because of the short
maturity of such instruments or because their interest rates
approximate comparable market rates available to the Company.

For the year-ended December 31 2002, the
Company also had short-term debt. The fair value was determined
by discounting cash flows based on contractual maturities at
interest rates expected to be available to the Company. The
estimated fair value of short-term debt at December 31,
2002 was $30,300,000.



|    |                           
|--- | --------------------------
|13. | Employee Stock Option Plan

The Companys 2000 Incentive Plan (the
2000 Plan) allows for the granting to officers,
employees, and non-employee directors of stock based awards
covering a maximum of 1,950,000 shares of common stock.

During 2003, 189,140 options were granted to
officers and key employees for the purchase of common stock. Of
these, 185,459 were granted at an exercise price of
$27.165 per share and 3,681 were granted at an exercise
price of $29.8815 per share. During 2002, 184,000 options
were granted to officers and key employees for the purchase of
common stock. Of these 160,077 were granted at an exercise price
of $25.49, 20,000 were granted at an exercise price of $23.65
and 3,923 were granted at an exercise price of $28.039. During
2001, 518,000 options were granted to officers and key
employees. Of these options, 512,808 were granted at an exercise
price of $19.275 and 5,192 at an exercise price of $21.202.
Options granted to officers and employees under the 2000 plan
generally have a term of ten years and vest and become
exercisable in cumulative annual installments of one-fifth each
beginning on the first anniversary of the date of grant.

Under the 2000 Plan, each nonemployee director is
automatically granted nonqualified stock options each year
following the annual meeting of stockholders. During 2003, each
of the Companys non-employee directors received a grant of
non-qualified stock options to purchase 3,000 shares of
common stock for a total of 30,000 shares at an exercise
price of $27.165 per share. During 2002, each of the
Companys nonemployee directors received a grant of
non-qualified stock options to purchase 2,942 shares of
common stock for a total of 26,478 shares at an exercise
price of $25.49 per share. Options granted to non-employee
directors have a term of ten years, are fully vested upon the
completion of one year of service as a non-employee director,
have an exercise price equal to the fair market value of the
Companys common stock on the date of grant, and become
exercisable in cumulative annual installments of one-third each,
beginning on the first anniversary of the date of grant.

The Companys 1999 Stock Option Plan (the
Plan) provided for the granting of options for the
purchase of the Companys class B common stock to
officers and key employees of the Company. Such options vested
over a four-year period and are exercisable for a ten-year
period. An aggregate of 1,050,000 shares of class B
common stock was reserved for grants of which a total of
702,000 shares were awarded. During 2003, the Plan was
amended to provide that no further awards were to be made under
the Plan.

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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of the status of the Companys
stock option activity, and related information for the years
ended December 31, 2003 and 2002, is presented below:

|                                         |  |        |           |                  |  |   |       | 
|---------------------------------------- |  | ------ | --------- | ---------------- |  | - | ----- | 
|                                         |  |        |           | Weighted Average
|                                         |  | Shares |           | Exercise Price  
|                                         |  |        |           |                 
|Outstanding at December 31, 2000         |  |        | 1,172,472 |                  |  |   | 9.48  | 
|                                         |  |        |           |                  |  |   |       | 
|Granted                                  |  |        | 535,458   |                  |  |   | 19.65 | 
|Exercised                                |  |        | (268,057  | )                |  |   | 4.43  | 
|Forfeited                                |  |        |          |                  |  |   |      | 
|                                         |  |        |           |                  |  |   |       | 
|Outstanding at December 31, 2001         |  |        | 1,439,873 |                  |  |   | 14.20 | 
|                                         |  |        |           |                  |  |   |       | 
|Granted                                  |  |        | 210,478   |                  |  |   | 25.36 | 
|Exercised                                |  |        | (223,699  | )                |  |   | 6.72  | 
|Forfeited                                |  |        |          |                  |  |   |      | 
|                                         |  |        |           |                  |  |   |       | 
|Outstanding at December 31, 2002         |  |        | 1,426,652 |                  |  | $ | 17.02 | 
|                                         |  |        |           |                  |  |   |       | 
|Granted                                  |  |        | 213,140   |                  |  |   | 27.21 | 
|Exercised                                |  |        | (243,034  | )                |  |   | 8.11  | 
|Forfeited                                |  |        | (56,161   | )                |  |   | 19.35 | 
|Outstanding at December 31, 2003         |  |        | 1,340,597 |                  |  | $ | 20.16 | 
|                                         |  |        |           |                  |  |   |       | 
|Options exercisable at December 31, 2001 |  |        | 180,569   |                  |  | $ | 11.17 | 
|Options exercisable at December 31, 2002 |  |        | 339,406   |                  |  | $ | 15.09 | 
|Options exercisable at December 31, 2003 |  |        | 515,523   |                  |  | $ | 17.02 | 

The following table summarizes information about
stock options outstanding as of December 31, 2003:

|                         |  |        |           |                  |  |                  |     |             |  |                   |       |  |  |  |         |  |  |   |       | 
|------------------------ |  | ------ | --------- | ---------------- |  | ---------------- | --- | ----------- |  | ----------------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                         |  |        |           |                  |  |                  |     |             |  | Weighted Average 
|                         |  |        |           | Weighted Average |  |                  |     |             |  | Exercise Price of
|                         |  |        |           | Remaining        |  | Weighted Average |     | Exercisable |  | Exercisable      
|Range of Exercise Prices |  | Shares |           | Contractual Life |  | Exercise Price   |     | Shares      |  | Shares           
|                         |  |        |           |                  |  |                  |     |             |  |                  
|$ 4.32 - $ 6.02          |  |        | 76,143    |                  |  |                  | 5.0 |             |  | $                 | 4.37  |  |  |  | 76,143  |  |  | $ | 4.37  | 
|15.04 -  18.05           |  |        | 341,738   |                  |  |                  | 6.7 |             |  |                   | 17.00 |  |  |  | 191,898 |  |  |   | 17.00 | 
|18.05 -  21.05           |  |        | 484,608   |                  |  |                  | 7.6 |             |  |                   | 19.24 |  |  |  | 188,240 |  |  |   | 19.22 | 
|21.05 -  24.06           |  |        | 25,192    |                  |  |                  | 3.3 |             |  |                   | 23.15 |  |  |  | 4,000   |  |  |   | 23.65 | 
|$24.06 - $27.07          |  |        | 180,555   |                  |  |                  | 8.2 |             |  |                   | 25.49 |  |  |  | 42,776  |  |  |   | 25.49 | 
|$27.07 - $30.08          |  |        | 232,361   |                  |  |                  | 8.9 |             |  |                   | 27.44 |  |  |  | 12,466  |  |  |   | 30.08 | 
|                         |  |        |           |                  |  |                  |     |             |  |                   |       |  |  |  |         |  |  |   |       | 
|                         |  |        | 1,340,597 |                  |  |                  | 7.5 |             |  | $                 | 20.16 |  |  |  | 515,523 |  |  | $ | 17.02 | 
|                         |  |        |           |                  |  |                  |     |             |  |                   |       |  |  |  |         |  |  |   |       | 

All amounts above have been adjusted for the
effects of the stock dividend accounted for as a stock split
described in Note 7.

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.

57



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SFAS 123 encourages, but does not require,
companies to record compensation cost for employee stock-based
compensation plans at fair value as determined by generally
recognized option pricing models such as the Black-Scholes model
or the binomial model. Because of the inexact and subjective
nature of deriving stock option values using these methods, the
Company has adopted the disclosure-only provisions of
SFAS 123 and continues to account for stock-based
compensation using the intrinsic value method prescribed in
APB 25. Accordingly, no compensation expense has been
recognized for the Plan or the 2000 Plan. Had compensation costs
for the Companys stock option plans been determined based
on the fair value at the grant date consistent with provisions
of SFAS 123, as amended by AFAS 148, the
Companys net income would have been decreased by
$1,827,000, $1,661,000 and $1,018,000 in 2003, 2002 and 2001,
respectively.

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 years
ended December 31, 2003, 2002 and 2001:

|                                                                                                                                        |  |                        |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                        |  |                       
|                                                                                                                                        |  | Year Ended December 31
|                                                                                                                                        |  |                       
|                                                                                                                                        |  | 2003                   |        | 2002 |  | 2001
|                                                                                                                                        |  |                        |        |      |  |     
|                                                                                                                                        |  |                       
|                                                                                                                                        |  | (In thousands         
|                                                                                                                                        |  | except per share data)
|Net income, as reported                                                                                                                 |  | $                      | 25,578 |      |  | $    | 26,492 |   |  | $ | 25,619 |  
|Deduct: Total stock-based employee compensation
    expense determined under the fair value based method for all
    awards, net of tax |  |                        | (1,827 | )    |  |      | (1,661 | ) |  |   | (1,018 | )
|                                                                                                                                        |  |                        |        |      |  |      |        |   |  |   |        |  
|Proforma net income                                                                                                                     |  | $                      | 23,751 |      |  | $    | 24,831 |   |  | $ | 24,601 |  
|                                                                                                                                        |  |                        |        |      |  |      |        |   |  |   |        |  
|Earnings per share:                                                                                                                     |  |                        |        |      |  |      |        |   |  |   |        |  
|Basic  as reported                                                                                                                     |  | $                      | 1.13   |      |  | $    | 1.18   |   |  | $ | 1.15   |  
|Basic  proforma                                                                                                                        |  | $                      | 1.05   |      |  | $    | 1.11   |   |  | $ | 1.11   |  
|Diluted  as reported                                                                                                                   |  | $                      | 1.11   |      |  | $    | 1.16   |   |  | $ | 1.13   |  
|Diluted  proforma                                                                                                                      |  | $                      | 1.03   |      |  | $    | 1.09   |   |  | $ | 1.09   |  

The pro forma fair value of options at the date
of the grant was estimated using the Black-Scholes model and the
following assumptions:

|                                                        |  |      |       |      |  |      |       |   |  |   |       |  
|------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                        |  | 2003 |       | 2002 |  | 2001
|                                                        |  |      |       |      |  |     
|Expected life (years)                                   |  |      | 5.5   |      |  |      | 6.25  |   |  |   | 6.25  |  
|Interest rate                                           |  |      | 2.75  | %    |  |      | 3.18  | % |  |   | 4.72  | %
|Volatility                                              |  |      | 49.83 | %    |  |      | 50.18 | % |  |   | 50.89 | %
|Dividend yield                                          |  |      | 0     | %    |  |      | 0     | % |  |   | 0     | %
|Weighted-average fair value per share at grant
    date |  | $    | 13.12 |      |  | $    | 13.26 |   |  | $ | 10.79 |  

During 2003, the Company granted a total of
76,054 in restricted stock units and shares of restricted stock
to officers and key employees. A stock unit represents the right
to receive a share of common stock on the date the restrictions
on the unit lapse. The restrictions on restricted stock units
and restricted stock generally lapse over a five year period
with sixty percent vesting on the third anniversary of the date
of grant and an additional twenty percent vesting on the fourth
and fifth anniversary dates of the grant. In the event a grantee
terminates employment with the Company, any restricted stock
units or restricted stock remaining subject to restrictions are
forfeited. During 2003, 800 of these awards were forfeited.
Restricted stock and unit awards result in the recognition of
deferred compensation. Deferred compensation is a contra-equity
account with an offset to additional paid in capital and is
amortized to operating expense over the vesting period of the
award.

58



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                
|--- | -------------------------------
|14. | Segment and Related Information

In accordance with 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.

Hydril is engaged worldwide in engineering,
manufacturing and marketing of premium connection and pressure
control products for oil and gas drilling and production. The
Company sells its products to steel pipe distributors, major and
independent, domestic and international oil and gas companies
and drilling contractors. The Companys products are
primarily targeted for use in drilling environments where
extreme pressure, temperature, corrosion and mechanical stress
are encountered, as well as in environmentally sensitive
drilling. These harsh conditions are typical for deepwater,
deep-formation and horizontal oil and gas wells.

The Companys premium connection segment
manufactures premium connections that are used in harsh drilling
environments. 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 the summary of significant accounting
policies. The Company evaluates performance based on operating
income or loss.

Financial data for the Companys business
segments for the years ended December 31, 2003, 2002 and
2001 is as follows:

|                        |                          |                         |   |         |         |      |   |         |         |  |   |         |         | 
|----------------------- | ------------------------ | ----------------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                        |                          |                        
|                        |                          | Year Ended December 31,
|                        |                          |                        
|                        |                          | 2003                    |   | 2002    |         | 2001
|                        |                          |                         |   |         |         |     
|                        |                          |                        
|                        |                          | (In thousands)         
|Revenue                 |                          |                         |   |         |         |      |   |         |         |  |   |        
|                        | Premium Connection       |                         | $ | 110,270 |         |      | $ | 127,116 |         |  | $ | 138,887 |        
|                        | Pressure Control         |                         |   | 101,747 |         |      |   | 114,408 |         |  |   | 100,674 |        
|                        |                          |                         |   |         |         |      |   |         |         |  |   |        
|                        |                          | Total                   |   | $       | 212,017 |      |   | $       | 241,524 |  |   | $       | 239,561 | 
|                        |                          |                         |   |         |         |      |   |         |         |  |   |        
|Operating income (loss) |                          |                         |   |         |         |      |   |         |         |  |   |        
|                        | Premium Connection       |                         | $ | 27,611  |         |      | $ | 36,721  |         |  | $ | 31,476  |        
|                        | Pressure Control         |                         |   | 20,261  |         |      |   | 19,721  |         |  |   | 21,168  |        
|                        | Corporate Administration |                         |   | (13,709 | )       |      |   | (12,117 | )       |  |   | (10,314 | )      
|                        |                          |                         |   |         |         |      |   |         |         |  |   |        
|                        |                          | Total                   |   | $       | 34,163  |      |   | $       | 44,325  |  |   | $       | 42,330  | 
|                        |                          |                         |   |         |         |      |   |         |         |  |   |        

59



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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                              |                          |                         |       |         |         |         |   |         |         |         |   |         |         |         | 
|----------------------------- | ------------------------ | ----------------------- | ----- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                              |                          |                        
|                              |                          | Year Ended December 31,
|                              |                          |                        
|                              |                          | 2003                    |       | 2002    |         | 2001   
|                              |                          |                         |       |         |         |        
|                              |                          |                        
|                              |                          | (In thousands)         
|Depreciation and amortization |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              | Premium Connection       |                         | $     | 7,367   |         |         | $ | 6,686   |         |         | $ | 5,799   |        
|                              | Pressure Control         |                         |       | 2,769   |         |         |   | 2,394   |         |         |   | 1,778   |        
|                              | Corporate Administration |                         |       | 1,764   |         |         |   | 1,747   |         |         |   | 1,630   |        
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              |                          |                         | Total |         | $       | 11,900  |   |         | $       | 10,827  |   |         | $       | 9,207   | 
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|Capital expenditures          |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              | Premium Connection       |                         | $     | 3,699   |         |         | $ | 9,601   |         |         | $ | 18,741  |        
|                              | Pressure Control         |                         |       | 3,548   |         |         |   | 7,138   |         |         |   | 9,169   |        
|                              | Corporate Administration |                         |       | 1,311   |         |         |   | 1,189   |         |         |   | 1,615   |        
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              |                          |                         | Total |         | $       | 8,558   |   |         | $       | 17,928  |   |         | $       | 29,525  | 
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|Total assets                  |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              | Premium Connection       |                         | $     | 98,071  |         |         | $ | 103,822 |         |         | $ | 103,583 |        
|                              | Pressure Control         |                         |       | 73,375  |         |         |   | 74,394  |         |         |   | 72,244  |        
|                              | Corporate Administration |                         |       | 93,106  |         |         |   | 99,992  |         |         |   | 116,344 |        
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              |                          |                         | Total |         | $       | 264,552 |   |         | $       | 278,208 |   |         | $       | 292,171 | 
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|Revenue                       |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              | United States            |                         | $     | 132,960 |         |         | $ | 148,857 |         |         | $ | 139,681 |        
|                              | Canada and Mexico        |                         |       | 35,355  |         |         |   | 34,008  |         |         |   | 36,180  |        
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              |                          | Subtotal North America  |       |         | 168,315 |         |   |         | 182,865 |         |   |         | 175,861 |        
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              | Eastern hemisphere       |                         |       | 43,702  |         |         |   | 58,659  |         |         |   | 63,700  |        
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              |                          |                         | Total |         | $       | 212,017 |   |         | $       | 241,524 |   |         | $       | 239,561 | 
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|Long-lived assets             |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              | United States            |                         | $     | 83,447  |         |         | $ | 86,035  |         |         | $ | 82,945  |        
|                              | Canada and Mexico        |                         |       | 15,961  |         |         |   | 14,959  |         |         |   | 11,149  |        
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              |                          | Subtotal North America  |       | $       | 99,408  |         |   | $       | 100,994 |         |   | $       | 94,094  |        
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              | Eastern hemisphere       |                         |       | 11,288  |         |         |   | 10,943  |         |         |   | 10,258  |        
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        
|                              |                          |                         | Total |         | $       | 110,696 |   |         | $       | 111,937 |   |         | $       | 104,352 | 
|                              |                          |                         |       |         |         |         |   |         |         |         |   |        

For the year ended December 31, 2003,
revenue from one customer of the Companys pressure control
segment represented 13% of the Companys consolidated
revenue and revenue from one customer of the Companys
premium connection segment represented 11% of the Companys
consolidated revenue. For the year ended December 31, 2002,
revenue from one customer of the Companys pressure control
segment represented 12% of the Companys consolidated
revenue.

60



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##### Table of Contents



HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                      
|--- | -----------------------------------------------------
|15. | Supplemental Quarterly Financial Data
    (Unaudited)

|                      |         |                                       |        |         |  |         |        |         |  |   |        |      |  |   |        |      | 
|--------------------- | ------- | ------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                      |         |                                      
|                      |         | Year Ended December 31, 2003         
|                      |         |                                      
|                      |         | First                                 |        | Second  |  | Third   |        | Fourth 
|                      |         | Quarter                               |        | Quarter |  | Quarter |        | Quarter
|                      |         |                                       |        |         |  |         |        |        
|                      |         |                                      
|                      |         | (In thousands, except per share data)
|Revenue               |         | $                                     | 57,338 |         |  | $       | 54,551 |         |  | $ | 50,243 |      |  | $ | 49,885 |     
|Gross profit          |         |                                       | 22,299 |         |  |         | 21,610 |         |  |   | 18,799 |      |  |   | 19,185 |     
|Operating income      |         |                                       | 10,328 |         |  |         | 9,688  |         |  |   | 6,167  |      |  |   | 7,980  |     
|Net income            |         |                                       | 6,463  |         |  |         | 6,163  |         |  |   | 7,726  | (1)  |  |   | 5,226  |     
|Net income per share: |         |                                       |        |         |  |         |        |         |  |   |        |      |  |   |        |     
|                      | Basic   |                                       | $      | 0.29    |  |         | $      | 0.27    |  |   | $      | 0.34 |  |   | $      | 0.23 | 
|                      | Diluted |                                       | $      | 0.28    |  |         | $      | 0.27    |  |   | $      | 0.34 |  |   | $      | 0.23 | 

|                      |         |                                       |        |         |  |         |        |         |  |   |        |      |  |   |        |      | 
|--------------------- | ------- | ------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                      |         |                                      
|                      |         | Year Ended December 31, 2002         
|                      |         |                                      
|                      |         | First                                 |        | Second  |  | Third   |        | Fourth 
|                      |         | Quarter                               |        | Quarter |  | Quarter |        | Quarter
|                      |         |                                       |        |         |  |         |        |        
|                      |         |                                      
|                      |         | (In thousands, except per share data)
|Revenue               |         | $                                     | 58,055 |         |  | $       | 64,068 |         |  | $ | 62,133 |      |  | $ | 57,268 |     
|Gross profit          |         |                                       | 20,730 |         |  |         | 23,991 |         |  |   | 23,627 |      |  |   | 22,322 |     
|Operating income      |         |                                       | 9,530  |         |  |         | 12,012 |         |  |   | 12,537 |      |  |   | 10,246 |     
|Net income            |         |                                       | 5,599  |         |  |         | 7,345  |         |  |   | 6,939  | (2)  |  |   | 6,609  |     
|Net income per share: |         |                                       |        |         |  |         |        |         |  |   |        |      |  |   |        |     
|                      | Basic   |                                       | $      | 0.25    |  |         | $      | 0.33    |  |   | $      | 0.31 |  |   | $      | 0.29 | 
|                      | Diluted |                                       | $      | 0.25    |  |         | $      | 0.32    |  |   | $      | 0.30 |  |   | $      | 0.29 | 



---



|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a research and experimentation tax
    credit of $3,705,000 related to qualified spending for the
    ten-year period from 1992 through 2001.                          
|   
|(2) | Includes a $1,215,000 pre-tax make-whole premium
    attributable to the Companys prepayment of $30,000,000 on
    its senior unsecured notes during the third quarter of 2002.



|    |                                 
|--- | --------------------------------
|16. | Recent Accounting Pronouncements

In December 2003, we adopted
SFAS No. 132 (Revised 2003), Employees
Disclosures about Pensions and Other Post Retirement
Benefits. The statement requires additional disclosures
relating to pensions and other post-retirement benefits, which
we have included in Note 6.

In December 2003, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the
Act) was passed. The Act introduces a prescription
drug benefit under Medicare (Medicare Part D), as well as a
federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent
to Medicare Part D. In January 2004, the FASB issued FASB Staff
Position No. FAS 106-1, Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug Improvements and Modernization Act of 2003
(FAS 106-1), which is effective for us as of
December 31, 2003 and permits a one-time election to defer
accounting for the effects of the Act. In accordance with
FAS 106-1, we have elected to defer accounting for the
effects of the Act and, as such, any measures of the
postretirement benefit obligations or net periodic
postretirement cost in the financial statements or accompanying
notes do not reflect the effects of the Act. Specific
authoritative guidance on the accounting for the federal subsidy
is pending and that guidance, when issued, could require us to
change previously reported information. However, we believe the
effect of the Act will not be material to our future results of
operations and financial condition.

61



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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 13 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-

62



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HYDRIL COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and 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.

63



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Hydrils Chief Executive Officer and Chief
Financial Officer have evaluated the Companys disclosure
controls and procedures as of December 31, 2003, and they
have 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.




PART III

Except as indicated below, information with
respect to the following items is incorporated by reference to
Hydrils definitive 2003 Annual Meeting Proxy Statement
(the Proxy Statement) to be filed with the
Securities and Exchange Commission in connection with the Annual
Meeting of Stockholders to be held on May 18, 2004.






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Pursuant to General Instruction G to
Form 10-K, the information regarding the Registrants
executive officers called for by Part III Item 10 is
set forth in at the end of Part I herein under the caption
Item S-K 401(b)  Executive Officers of the
Registrant. The other information required by this item
will be set forth under the captions Election of
Directors and Security Ownership of Certain
Beneficial Owners and Management  Section 16(a)
Beneficial Ownership Reporting Compliance in the Proxy
Statement, which sections are incorporated herein by reference.

Hydrils code of ethics, known as its Code
of Business Conduct and Ethics, applies to all officers and
employees of Hydril, including its principal executive officer,
principal financial officer, principal accounting officer and
controller. The Code of Business Conduct and Ethics satisfies
the requirements for a code of ethics under Item 406 of
Regulation S-K. Hydril intends to post its Code of Business
Conduct and Ethics on its website, www.hydril.com
<http://www.hydril.com>, in the near future. Pending its
availability on the website, a copy of the Code of Business
Conduct and Ethics may be obtained, free of charge, by making a
request in writing to the Corporate Secretary, Hydril Company
3300 North Sam Houston Parkway East, Houston, Texas 77032-3411.
In addition, Hydril intends to satisfy the disclosure
requirements of Item 10 of Form 8-K regarding any
amendments to, or waiver from, a provision of the Code of
Business Conduct and Ethics that applies to Hydrils
principal executive officer, principal financial officer,
principal accounting officer or controller and relates to any
element of the definition of code of ethics set forth in
Item 406(b) of Regulation S-K by posting such
information on its website, www.hydril.com.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item will be set
forth under the captions Election of Directors 
Compensation of Directors, Election of
Directors  Compensation Committee Interlocks and
Insider Participation and Compensation of Executive
Officers in the Proxy Statement, which sections are
incorporated herein by reference.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information required by this item will be set
forth under the captions Security Ownership of Certain
Beneficial Owners and Management and Equity
Compensation Plan Information in the Proxy Statement,
which section is incorporated herein by reference.

64



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##### Table of Contents








|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item will be set
forth under the caption Certain Relationships and Related
Transactions in the Proxy Statement, which section is
incorporated herein by reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The information required by this item will be set
forth under the caption Independent Public
Accountants in the Proxy Statement, which section is
incorporated herein by reference.




PART IV






|        |                                                                    
|------- | -------------------------------------------------------------------
|Item 15 | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) The following documents are filed as
part of this report:



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

|            |        |  |  |   |  |                                                                                                                                                                                                                                                                      
|----------- | ------ |  |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        |  |  |  
|            |        |  |  |  
|            | 3.1*   |  |  |  |  | Restated Certificate of Incorporation of the
    Company (incorporated by reference to Exhibit 3.1 of the
    Companys Form 10-Q filed with the Commission on
    November 14, 2000).                                                                               
|            | 3.2*   |  |  |  |  | Restated Bylaws of the Company (incorporated by
    reference to Exhibit 3.2 of Amendment No. 1 to the
    Registration Statement on Form S-1 of the Company filed
    with the Commission on July 31, 2000).                                                        
|            | 4.1*   |  |  |  |  | Form of Specimen Common Stock Certificate
    (incorporated by reference to Exhibit 4.1 of Amendment
    No. 1 to the Registration Statement on Form S-1 of the
    Company filed with the Commission on July 31, 2000).                                             
|            | 4.2*   |  |  |  |  | Registration Rights Agreement among the Company
    and the stockholders named therein (incorporated by reference to
    Exhibit 4.2 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).
|            | 10.1*  |  |  |  |  | Loan Agreement dated as of June 30, 2003
    among Hydril Company, Banc One Capital Markets, Inc. and
    Bank One, NA. (incorporated by reference to exhibit 10.1 of
    the Companys Form 10-Q dated June 30, 2003).                                              
|            | 10.2* |  |  |  |  | Employment Agreement with Neil Russell dated
    October 1, 2002 (incorporated by reference to
    Exhibit 10.1 of the Companys Form 10-Q for the
    quarter ended September 30, 2002).                                                                            
|            | 10.3* |  |  |  |  | Hydril Company 1999 Stock Option Plan
    (incorporated by reference to Exhibit 10.1 of Amendment
    No. 1 to the Registration Statement on Form S-1 of the
    Company filed with the Commission on July 31, 2000).                                                
|            | 10.4* |  |  |  |  | Hydril Company 2000 Incentive Plan (incorporated
    by reference to Exhibit 10.3 of Amendment No. 1 to the
    Registration Statement on Form S-1 of the Company filed
    with the Commission on July 31, 2000).                                                   
|            | 10.5  |  |  |  |  | Amendment to Hydril Company 2000 Incentive Plan.                                                                                                                                                                                                                     
|            | 10.6* |  |  |  |  | Form of Indemnification Agreement (incorporated
    by reference to Exhibit 10.5 of Amendment No. 1 to the
    Registration Statement on Form S-1 of the Company filed
    with the Commission on July 31, 2000).                                                    

65



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##### Table of Contents



|            |        |  |  |   |  |                                                                                                                                                                                                                                 
|----------- | ------ |  |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        |  |  |  
|            |        |  |  |  
|            | 10.7* |  |  |  |  | Employee Stock Purchase Plan (incorporated by
    reference to Exhibit 10.6 of Amendment No. 1 to the
    Registration Statement on Form S-1 of the Company filed
    with the Commission on July 31, 2000).                    
|            | 10.8* |  |  |  |  | Hydril Company Restoration Plan (incorporated by
    reference to Exhibit 10.13 of the Companys
    Form 10-K for the year-ended December 31, 2001).                                                                           
|            | 10.9* |  |  |  |  | Form of Change in Control Agreement (incorporated
    by reference to Exhibit 10.14 of the Companys
    Form 10-K for the year-ended December 31, 2001).                                                                       
|            | 21.1   |  |  |  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                 
|            | 23.1   |  |  |  |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                               
|            | 24.1   |  |  |  |  | Powers of Attorney.                                                                                                                                                                                                             
|            | 31.1   |  |  |  |  | Certification by Christopher T. Seaver, Chief
    Executive Officer, pursuant to Rule 13a-14(a) of the
    Securities Exchange Act of 1934.                                                                                     
|            | 31.2   |  |  |  |  | Certification by Michael C. Kearney, Chief
    Financial Officer, pursuant to Rule 13a-14(a) of the
    Securities Exchange Act of 1934.                                                                                        
|            | 32.1   |  |  |  |  | Certification by Christopher T. Seaver, Chief
    Executive Officer, pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 (Subsection (a) and (b) of
    Section 1350, Chapter 63 of Title 18, United
    States Code).
|            | 32.2   |  |  |  |  | Certification by Michael C. Kearney, Chief
    Financial Officer, pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 (Subsection (a) and (b) of
    Section 1350, Chapter 63 of Title 18, United
    States Code).   



---



|  |                                        
|- | ---------------------------------------
|* | Incorporated by reference as indicated.



|  |                                                   
|- | --------------------------------------------------
| | Denotes management compensatory plan or agreement.

Reports on Form 8-K:



| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 29, 2003, we submitted a report
    on Form 8-K furnishing pursuant to Items 9 and 12 the
    news release issued by Hydril Company dated October 28,
    2003. Pursuant to Item 7, we attached the news release as
    an exhibit to the report.
|
| | On December 18, 2003, we submitted a report
    on Form 8-K furnishing pursuant to Items 9 the news
    release issued by Hydril Company dated December 17, 2003.
    Pursuant to Item 7, we attached the news release as an
    exhibit to the report.     

66



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##### Table of Contents






SIGNATURE

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this Annual Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 12th day of March 2004.



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



| |     |                       
| | --- | ----------------------
| | By: | /s/ MICHAEL C. KEARNEY

| |                                                 
| | ------------------------------------------------
| |                                                 
| | Michael C. Kearney                              
| | Chief Financial Officer and                     
| | Vice President  Finance                        
| | (Authorized officer and principal
    accounting
| | and financial officer)                          

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this Annual Report on
Form 10-K has been signed by the following persons in the
capacities indicated below on the 9th day of March 2004.

|                                               |  |                                                                                                                                         |  | 
|---------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | 
|                                               |  |                                                                                                                                        
|Signature                                      |  | Title                                                                                                                                  
|                                               |  |                                                                                                                                        
|                                              
|/s/ CHRISTOPHER T. SEAVERChristopher T. Seaver |  | President, Chief Executive Officer and
    Director
    (Principal Executive Officer)                                                  
|                                              
|/s/ MICHAEL C. KEARNEYMichael C. Kearney       |  | Chief Financial Officer and Vice
    President  Administration (Authorized Officer and
    Principal Accounting and Financial Officer)
|                                              
|*Richard C. Seaver                             |  | Chairman of the Board                                                                                                                  
|                                              
|*Richard A. Archer                             |  | Director                                                                                                                               
|                                              
|*Jerry S. Cox                                  |  | Director                                                                                                                               
|                                              
|*Roger Goodan                                  |  | Director                                                                                                                               
|                                              
|*Gordon T. Hall                                |  | Director                                                                                                                               
|                                              
|*Kenneth S. McCormick                          |  | Director                                                                                                                               
|                                              
|*Patrick T. Seaver                             |  | Director                                                                                                                               

67



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##### Table of Contents



|              |  |                                                                |  | 
|------------- |  | -------------------------------------------------------------- |  | 
|              |  |                                                               
|Signature     |  | Title                                                         
|              |  |                                                               
|             
|*T. Don Stacy |  | Director                                                      
|             
|*Lew O. Ward  |  | Director                                                      
|             
|By:           |  | /s/ CHRISTOPHER T. SEAVERChristopher T. SeaverAttorney-in-fact |  | 

68



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##### Table of Contents



INDEX TO EXHIBITS

|            |        |  |  |   |  |                                                                                                                                                                                                                                                                      
|----------- | ------ |  |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |        |  |  |  
|            |        |  |  |  
|            | 3.1*   |  |  |  |  | Restated Certificate of Incorporation of the
    Company (incorporated by reference to Exhibit 3.1 of the
    Companys Form 10-Q filed with the Commission on
    November 14, 2000).                                                                               
|            | 3.2*   |  |  |  |  | Restated Bylaws of the Company (incorporated by
    reference to Exhibit 3.2 of Amendment No. 1 to the
    Registration Statement on Form S-1 of the Company filed
    with the Commission on July 31, 2000).                                                        
|            | 4.1*   |  |  |  |  | Form of Specimen Common Stock Certificate
    (incorporated by reference to Exhibit 4.1 of Amendment
    No. 1 to the Registration Statement on Form S-1 of the
    Company filed with the Commission on July 31, 2000).                                             
|            | 4.2*   |  |  |  |  | Registration Rights Agreement among the Company
    and the stockholders named therein (incorporated by reference to
    Exhibit 4.2 of Amendment No. 1 to the Registration
    Statement on Form S-1 of the Company filed with the
    Commission on July 31, 2000).
|            | 10.1*  |  |  |  |  | Loan Agreement dated as of June 30, 2003
    among Hydril Company, Banc One Capital Markets, Inc. and
    Bank One, NA. (incorporated by reference to exhibit 10.1 of
    the Companys Form 10-Q dated June 30, 2003).                                              
|            | 10.2* |  |  |  |  | Employment Agreement with Neil Russell dated
    October 1, 2002 (incorporated by reference to
    Exhibit 10.1 of the Companys Form 10-Q for the
    quarter ended September 30, 2002).                                                                            
|            | 10.3* |  |  |  |  | Hydril Company 1999 Stock Option Plan
    (incorporated by reference to Exhibit 10.1 of Amendment
    No. 1 to the Registration Statement on Form S-1 of the
    Company filed with the Commission on July 31, 2000).                                                
|            | 10.4* |  |  |  |  | Hydril Company 2000 Incentive Plan (incorporated
    by reference to Exhibit 10.3 of Amendment No. 1 to the
    Registration Statement on Form S-1 of the Company filed
    with the Commission on July 31, 2000).                                                   
|            | 10.5  |  |  |  |  | Amendment to Hydril Company 2000 Incentive Plan.                                                                                                                                                                                                                     
|            | 10.6* |  |  |  |  | Form of Indemnification Agreement (incorporated
    by reference to Exhibit 10.5 of Amendment No. 1 to the
    Registration Statement on Form S-1 of the Company filed
    with the Commission on July 31, 2000).                                                    
|            | 10.7* |  |  |  |  | Employee Stock Purchase Plan (incorporated by
    reference to Exhibit 10.6 of Amendment No. 1 to the
    Registration Statement on Form S-1 of the Company filed
    with the Commission on July 31, 2000).                                                         
|            | 10.8* |  |  |  |  | Hydril Company Restoration Plan (incorporated by
    reference to Exhibit 10.13 of the Companys
    Form 10-K for the year-ended December 31, 2001).                                                                                                                
|            | 10.9* |  |  |  |  | Form of Change in Control Agreement (incorporated
    by reference to Exhibit 10.14 of the Companys
    Form 10-K for the year-ended December 31, 2001).                                                                                                            
|            | 21.1   |  |  |  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                      
|            | 23.1   |  |  |  |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                    
|            | 24.1   |  |  |  |  | Powers of Attorney.                                                                                                                                                                                                                                                  
|            | 31.1   |  |  |  |  | Certification by Christopher T. Seaver, Chief
    Executive Officer, pursuant to Rule 13a-14(a) of the
    Securities Exchange Act of 1934.                                                                                                                          
|            | 31.2   |  |  |  |  | Certification by Michael C. Kearney, Chief
    Financial Officer, pursuant to Rule 13a-14(a) of the
    Securities Exchange Act of 1934.                                                                                                                             
|            | 32.1   |  |  |  |  | Certification by Christopher T. Seaver, Chief
    Executive Officer, pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 (Subsection (a) and (b) of
    Section 1350, Chapter 63 of Title 18, United
    States Code).                                     
|            | 32.2   |  |  |  |  | Certification by Michael C. Kearney, Chief
    Financial Officer, pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 (Subsection (a) and (b) of
    Section 1350, Chapter 63 of Title 18, United
    States Code).                                        



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|  |                                        
|- | ---------------------------------------
|* | Incorporated by reference as indicated.



|  |                                                   
|- | --------------------------------------------------
| | Denotes management compensatory plan or agreement.