<PAGE>

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                       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, 2002

                        COMMISSION FILE NUMBER 000-31579

                                 HYDRIL COMPANY
             (Exact name of registrant as specified in its charter)

<Table>
<S>                                                <C>
                    DELAWARE                                          95-2777268
        (State or other jurisdiction of                             (IRS Employer
         incorporation or organization)                          Identification No.)

      3300 NORTH SAM HOUSTON PARKWAY EAST                             77032-3411
                 HOUSTON, TEXAS                                       (Zip Code)
    (Address of principal executive offices)
</Table>

               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
                                 (281) 449-2000

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<Table>
<Caption>
               TITLE OF EACH CLASS                    NAME OF EACH EXCHANGE ON WHICH REGISTERED
               -------------------                    -----------------------------------------
<S>                                               <C>
     Common Stock, par value $.50 per share                      Nasdaq Stock Market
</Table>

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]     No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (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.  [ ]

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

     Aggregate market value of common stock and class B common stock held by
nonaffiliates of the registrant as of June 28, 2002: $409,031,730. 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 3, 2003:

        Common stock outstanding:  15,433,016 shares

        Class B common stock outstanding:  7,192,427 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, 2002 in
connection with the Registrant's 2003 Annual Meeting of Stockholders.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                 HYDRIL COMPANY

                                   FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 2002

                                     INDEX

<Table>
<Caption>
                                                                                  PAGE
                                                                                  ----
<S>                <C>                                                            <C>
                                        PART I
Item 1.            Business....................................................     1
Item 2.            Properties..................................................    11
Item 3.            Legal Proceedings...........................................    11
Item 4.            Submission of Matters to a Vote of Security Holders.........    12
Item S-K 401(b)    Executive Officers of the Registrant........................    12
                                       PART II
                   Market for Registrant's Common Equity and Related
Item 5.            Stockholder Matters.........................................    13
Item 6.            Selected Financial Data.....................................    14
                   Management's Discussion and Analysis of Financial Condition
Item 7.            and Results of Operations...................................    15
                   Quantitative and Qualitative Disclosures About Market
Item 7A.           Risk........................................................    32
Item 8.            Financial Statements and Supplementary Data.................    34
                   Changes in and Disagreements with Accountants on Accounting
Item 9.            and Financial Disclosure....................................    60
                                       PART III
Item 10.           Directors and Executive Officers of the Registrant..........    60
Item 11.           Executive Compensation......................................    60
                   Security Ownership of Certain Beneficial Owners and
Item 12.           Management..................................................    60
Item 13.           Certain Relationships and Related Transactions..............    60
Item 14.           Controls and Procedures.....................................    60
                                       PART IV
                   Exhibits, Financial Statement Schedules and Reports on Form
Item 15.           8-K.........................................................    60
Signatures.....................................................................    63
</Table>

                             ---------------------
           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 THE IMPACT OF OIL
AND GAS PRICES AND WORLDWIDE ECONOMIC CONDITIONS ON DRILLING ACTIVITY AND THE
DEMAND FOR AND PRICING OF HYDRIL'S PRODUCTS AND HYDRIL'S ASSUMPTIONS RELATING
THERETO. 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 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.
                                        i
<PAGE>

                                     PART I

ITEM 1 -- BUSINESS

     Hydril Company is engaged worldwide in engineering, manufacturing and
marketing premium connection and pressure control products used for oil and gas
drilling and production. Our premium connections are used in drilling
environments where extreme pressure, temperature, corrosion and mechanical
stress are encountered, as well as in environmentally sensitive drilling. These
harsh drilling conditions are typical for deep-formation, deepwater and
horizontal wells. Our pressure control products are primarily safety devices
that control and contain fluid and gas pressure during drilling, completion and
maintenance of oil and gas wells 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 Company 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. While it has not been
the case recently, increasing commodity prices generally 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 oil and gas prices.

     Sales of premium connection products are driven by the level of worldwide
drilling activity, in particular 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. 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.

     Recently, drilling activity in the United States and Canada has declined
despite rising commodity prices. 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
increased 39%. However, the commodity price recovery, which in part was fueled
by global uncertainties over a 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 with Iraq, led to less spending.

     Drilling rig counts that drive demand for our premium connections and
aftermarket parts and services declined during 2002. The average deep formation
rig count in the United states (rigs drilling to a depth over 15,000 feet) for
the year declined 20% from 2001, the average United States and Canada combined
rig count

                                        1
<PAGE>

decreased 27% from 2001 and the number of rigs drilling in water depths greater
than 1,500 feet in the Gulf of Mexico declined 13%.

     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 changing depth and drilling 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 drilling techniques.

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 1998
through 2002:

<Table>
<Caption>
      AVERAGE UNITED STATES RIG COUNT         AVERAGE GULF OF MEXICO RIG COUNT
             OVER 15,000 FT(1)                  OVER 1,500 FT WATER DEPTH(2)
      -------------------------------         --------------------------------
                                    NUMBER                                      NUMBER
YEAR                                OF RIGS                                     OF RIGS
----                                -------                                     -------
<S>                                 <C>       <C>                               <C>
1998..............................    119     ...............................     23
1999..............................     92     ...............................     20
2000..............................    121     ...............................     23
2001..............................    161     ...............................     30
2002..............................    128     ...............................     26
</Table>

---------------

(1) Source: We calculated the average rig count using weekly data published by
    Smith International

(2) Source: We calculated the average rig count using monthly data provided by
    ODS-Petrodata Group

     Internationally, the total rig count is a relevant indicator of the premium
connections market. The following table shows the average rig count
internationally for land and offshore combined for each of the years 1998
through 2002:

<Table>
<Caption>
                      AVERAGE INTERNATIONAL
                           RIG COUNT(1)
                      ---------------------
                                                           NUMBER
YEAR                                                       OF RIGS
----                                                       -------
<S>                                                        <C>
1998.....................................................    754
1999.....................................................    588
2000.....................................................    652
2001.....................................................    745
2002.....................................................    732
</Table>

---------------

(1) Source: We calculated the average rig counts using monthly data published by
    Baker Hughes Incorporated. The international rig count includes data for
    Europe, the Middle East, Africa, Latin America and Asia Pacific, and
    excludes data for Canada and the United States.

                                        2
<PAGE>

     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
compared to demand for aftermarket replacement parts 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. The following tables show the average worldwide offshore
rig count and the average U.S. rig count for each of the years 1998 through
2002:

<Table>
<Caption>
        AVERAGE WORLDWIDE OFFSHORE             AVERAGE UNITED STATES TOTAL
               RIG COUNT(1)                            RIG COUNT(2)
        --------------------------             ---------------------------
                                    NUMBER                                    NUMBER
YEAR                                OF RIGS                                   OF RIGS
----                                -------                                   -------
<S>                                 <C>       <C>                             <C>
1998..............................    377     ..............................     827
1999..............................    291     ..............................     625
2000..............................    331     ..............................     918
2001..............................    378     ..............................   1,156
2002..............................    344     ..............................     830
</Table>

---------------

(1) Source: We calculated the average rig count using weekly data for the United
    States and Canada, and monthly data for the international regions, as
    published by Baker Hughes Incorporated. The worldwide offshore rig count
    includes data for Europe, the Middle East, Africa, Latin America, Asia
    Pacific, the United States and Canada.

(2) Source: We calculated the average rig count 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 of
drill pipe to be screwed together. Once connected, the drill pipe may be up to
several miles long, commonly

                                        3
<PAGE>

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 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 nine 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 Thread(TM) 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 connections and
       drill string. Our corrosion barrier ring, when used on plastic coated
       tubing connections, provides the

                                        4
<PAGE>

       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 29 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.

                                        5
<PAGE>

     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
equipment, and products for use in conjunction with subsea mudlift drilling. As
of December 31, 2002, 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 manufacturing
activities, we have a policy of seeking patents, when appropriate, on inventions
concerning new equipment

                                        6
<PAGE>

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.  In October 2001, the subsea mudlift drilling
project successfully completed its final phase of operation by drilling a test
well in the Gulf of Mexico. We were the technical leader, designer and equipment
manufacturer for this joint industry project. We have exclusive production
rights to the technology for this application for the life of the intellectual
property. 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 team completed its work in 2001 and during 2002
Hydril continued the process of refining the design of the equipment and
pursuing commercialization of this technology. In connection with its efforts to
commercialize the equipment, Hydril is solely responsible for its on-going
expenditures, which were less than 5% of total selling, general and
administrative expenses in 2002. 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-Loq(TM) Ram Blowout preventer.  In 2002, Hydril developed the
Quik-Loq(TM) 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.

     Expandable Premium Connections.  During 2002, Hydril continued its efforts
to improve threaded connections, which included 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%.

     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 are not successful in developing and commercializing subsea
mudlift drilling technology or other new technologies, our growth prospects may
be

                                        7
<PAGE>

reduced" 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 2002, we sold products and services to approximately 1,250
customers, only one of which, GlobalSantaFe Corporation at 12%, accounted for
more than 10% 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 2002, our nine distributors accounted for 63% 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.

     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. 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".

     In 2002, our largest premium connection customer worldwide accounted for
19% 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 20 offices in the United States, Canada, Indonesia, Singapore,
Mexico, Nigeria, Eastern Europe, Venezuela, and the United Kingdom. We use
manufacturer representatives in 56 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 2002, our two largest
pressure control customers accounted for 26% and 18% of segment sales. Our ten
largest customers in our pressure control segment in 2002 accounted for 70% 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 63 countries worldwide.

                                        8
<PAGE>

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 Premium
Connections and Tubular Products 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, 2002, we had a total of approximately 1,400 full-time
and full-time equivalent employees. Approximately 540 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 64 employees located in Veracruz, Mexico and approximately 49
employees in Port Harcourt and Warri, Nigeria. These agreements are subject to
annual review. We believe our relations with our employees are good.

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
providing for indemnification against liability to others. Our insurance is
subject to deduct-
                                        9
<PAGE>

ibles 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.

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 wastes found at the site. Persons who
are responsible for releases of hazardous substances under CERCLA may be subject
to joint and several liability for the costs of cleaning up the resulting
contamination and for damages to natural resources. It is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment.

     We were identified as a potentially responsible party at one CERCLA site,
the Operating Industries, Inc. Landfill Superfund site in California, to which
we formerly sent waste oils and other materials for disposal. Our agreed upon
share of the total cleanup costs was approximately $303,000, which was paid in
full in July 2002. The obligation had been adequately reserved for in the
financials statements and did not materially affect our results of operation or
financial condition. We have also been identified as a potentially responsible
party under analogous state law with respect to a waste disposal site near
Houston, Texas. Based on (1) the number of other potentially responsible
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 the EPA, state agencies 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.
                                        10
<PAGE>

     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 MATTERS

     In 2002, approximately 69% of our total revenue was derived from equipment
or services ultimately provided or delivered to end-users outside the United
States, and approximately 30% of our revenue was derived from products which
were produced and used outside of the United States. 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".

ITEM 2 -- PROPERTIES

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

<Table>
<Caption>
                                        APPROXIMATE
                                          SQUARE
LOCATION                                  FOOTAGE                  DESCRIPTION
--------                                -----------                -----------
<S>                                     <C>           <C>
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
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;
Batam, Indonesia (Land is leased).....     30,000     Premium connection manufacturing.
Veracruz, Mexico......................    115,000     Premium connection manufacturing.
Veracruz, Mexico (leased).............     25,000     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.
</Table>

     We have 23 sales and service offices worldwide in Alaska, California,
Louisiana, Texas, Wyoming, Canada, Indonesia, Mexico, Nigeria, Singapore,
Venezuela and the United Kingdom. Most of these 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 118 acres of undeveloped land surrounding some
of the properties listed above and approximately 74 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.

                                        11
<PAGE>

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, 2002.

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

     The following table provides information regarding our executive officers
as of December 31, 2002.

<Table>
<Caption>
NAME                                       AGE                  POSITION(S)
----                                       ---                  -----------
<S>                                        <C>   <C>
Richard C. Seaver........................  80    Chairman of the Board
Christopher T. Seaver....................  54    President, Chief Executive Officer and
                                                 Director
Charles E. Jones.........................  43    Vice President--Pressure Control
Neil G. Russell..........................  57    Vice President--Premium Connection
Michael C. Kearney.......................  53    Chief Financial Officer and Vice
                                                 President--Administration
</Table>

     Richard C. Seaver is 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. Seaver, is our President and 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. Mr. Seaver joined Hydril in 1985
and served as Executive Vice President in charge of Hydril's premium connection
and pressure control businesses from 1991 until May 1993. He is a director and
the secretary of the Petroleum Equipment Suppliers 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. Jones is Vice President of our Pressure Control segment, a
position he was appointed to in November 2001. Previously, he served as our
Managing Director--Pressure Control beginning in March 1998. 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.

     Neil G. Russell is Vice President of our Premium Connection segment, a
position he was appointed to in November 2001. Previously, he was Managing
Director--Eastern Hemisphere Premium Connection, beginning in March 1995.
Overall, Mr. Russell has 24 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.

     Michael C. Kearney is our Chief Financial Officer and Vice
President--Administration, 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.

                                        12
<PAGE>

                                    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 2002 and 2001.

<Table>
<Caption>
                                                    HIGH     LOW
                                                   ------   ------
<S>                                                <C>      <C>
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
2001
First Quarter....................................  $25.94   $16.00
Second Quarter...................................   33.20    20.59
Third Quarter....................................   25.00    12.89
Fourth Quarter...................................   23.00    13.68
</Table>

     As of December 31, 2002, the closing sales price per share of our common
stock as reported by the Nasdaq National Market was $23.57. Based on inquiries
made in connection with preparations for our 2003 Annual Meeting of
Stockholders, Hydril estimates that there are at least 2,000 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 March 5, 2003, our common stock was held by 14 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.

USE OF PROCEEDS

     In October 2000, we completed an initial public offering of 8,600,000
shares of common stock, which were sold at $17.00 per share. Of the 8,600,000
shares, 2,672,668 shares were sold by Hydril and 5,927,332 shares were sold by
existing stockholders. The net proceeds to Hydril from the offering, after
deducting the foregoing expenses, were $39.6 million. None of Hydril's proceeds
from the offering have been or will be paid to directors, officers, affiliates
of Hydril, or persons owning 10% or more of any class of Hydril's common stock.

     Since completing the offering, we have used all of the net proceeds as
follows: $24 million for the initial costs to expand capacity at our premium
connection facilities, primarily in the United States and Canada, $12 million to
upgrade machinery and equipment in our Houston pressure control plants and $4
million for the development and commercialization of our subsea mudlift drilling
technology and expansion of our advanced composite tubing production.

                                        13
<PAGE>

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.

<Table>
<Caption>
                                                       YEARS ENDED DECEMBER 31,
                                     -------------------------------------------------------------
                                       2002          2001          2000         1999        1998
                                     --------      --------      --------     --------    --------
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                  <C>           <C>           <C>          <C>         <C>
OPERATING DATA:
Revenue:
  Premium connection...............  $127,116      $138,887      $ 94,983     $ 75,362    $116,256
  Pressure control.................   114,408       100,674        85,039       84,063     122,956
                                     --------      --------      --------     --------    --------
           Total revenue...........   241,524       239,561       180,022      159,425     239,212
Gross profit.......................    90,670        84,217        56,220       25,655      30,404
Selling, general and administration
  expenses.........................    46,345        41,887        34,802       33,404      41,048
                                     --------      --------      --------     --------    --------
Operating income (loss)(1).........    44,325        42,330        21,418       (7,749)    (10,644)
Interest expense...................     4,831(5)      4,403         4,963        5,528       4,347
Interest income....................     1,477         2,874         2,320        1,314         855
Other income (expense).............      (214)       (1,082)(4)     5,433(3)       997      (7,834)(2)
Net income (loss)..................  $ 26,492      $ 25,619      $ 15,614     $ (7,237)   $(14,500)
Income (loss) per share(6):
  Basic............................  $   1.18      $   1.15      $   0.78     $  (0.37)   $  (0.75)
  Diluted..........................  $   1.16      $   1.13      $   0.76     $  (0.37)   $  (0.75)
Weighted average shares
  outstanding(6):
  Basic............................    22,414        22,211        20,023       19,379      19,384
  Diluted..........................    22,833        22,575        20,557       19,379      19,384
OTHER DATA:
Capital expenditures...............  $ 17,928      $ 29,525      $ 13,575     $  8,790    $ 15,767
Depreciation.......................    10,827         9,207         8,579        7,851       6,324
EBITDA(7)..........................    54,938        50,455        35,430        1,099     (12,154)
BALANCE SHEET DATA:
Working capital....................  $ 92,148      $130,728      $116,911     $ 81,378    $ 97,227
Property, net......................   107,031       100,038        79,070       74,579      73,861
Total assets.......................   278,208       292,171       254,646      211,808     259,076
Long-term debt and capital leases,
  excluding current portion........        --        60,000        60,286       73,039      76,244
Other long-term liabilities........    16,370        15,575        15,549       18,011      18,137
Total stockholders' equity.........   187,137       160,185       131,729       76,446      83,683
</Table>

---------------

(1) Results of operations include $27.5 million of operating losses in 1998,
    $3.7 million of operating losses in 1999, and $1.5 million of operating
    losses in 2000, under fixed-price contracts to provide pressure control
    equipment and subsea control systems for pressure control equipment. Our
    1999 results of operations also include a $10.5 million pre-tax charge to
    replace some of our blowout preventer equipment.

(2) For 1998, other expense included a pre-tax $6.1 million permanent decline in
    the fair market value of stock of Weatherford International obtained in 1997
    and held for sale, and pre-tax $2.8 million for the cost of put options to
    sell the stock.

(3) 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 Weatherford stock in 1998 and a pre-tax gain
    of $1.9 million from the sale of real estate not used in operations.

                                        14
<PAGE>

(4) 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.

(5) 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.

(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.

(7) EBITDA consists of net income (loss) before interest expense, provision
    (benefit) for income taxes and depreciation, less interest income. EBITDA is
    not a measure of financial performance under generally accepted accounting
    principles. You should not consider it in isolation from or as a substitute
    for net income or cash flow measures prepared in accordance with generally
    accepted accounting principles or as a measure of our profitability or
    liquidity. EBITDA is included as a supplemental disclosure because it may
    provide useful information regarding our ability to service debt and to fund
    capital expenditures. Additionally, EBITDA is presented because it is a
    widely accepted measure of financial performance used by some analysts and
    investors to analyze and compare companies on the basis of operating
    performance. The following table reconciles EBITDA to operating income, the
    most comparable measure under generally accepted accounting principles.

<Table>
<Caption>
                                                        YEARS ENDED DECEMBER 31,
                                            ------------------------------------------------
                                             2002      2001      2000      1999       1998
                                            -------   -------   -------   -------   --------
                                                             (IN THOUSANDS)
    <S>                                     <C>       <C>       <C>       <C>       <C>
    Operating income (loss)...............  $44,325   $42,330   $21,418   $(7,749)  $(10,644)
    Other income (expense)................     (214)   (1,082)    5,433       997     (7,834)
    Depreciation..........................   10,827     9,207     8,579     7,851      6,324
                                            -------   -------   -------   -------   --------
      EBITDA..............................  $54,938   $50,455   $35,430   $ 1,099   $(12,154)
                                            =======   =======   =======   =======   ========
</Table>

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. Drilling contractors purchase
pressure control capital equipment products and aftermarket replacement parts
for use in oil and gas drilling and 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. While it has not been the case recently, 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 oil and gas prices.

     Sales of premium connection products are driven by the level of worldwide
drilling activity, in particular 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. 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.

                                        15
<PAGE>

     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 commodity prices led to a decline in
drilling 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 a 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 with
Iraq, led to less spending. The average deep formation rig count in the United
states (rigs drilling to a depth over 15,000 feet) for the year declined 20%
from 2001, the average United States and Canada combined rig count, as measured
by Baker Hughes, decreased 27% from 2001 and the number of rigs drilling in
water depths greater than 1,500 feet declined 13%. As a result of these reduced
rig counts, demand for premium connections and aftermarket parts and service
decreased in the United States and Canada in 2002.

     Generally, our international premium connection business has not been
impacted by the decline in rig counts experienced in North America during 2002
and 2001. Our international business typically has longer lead times than our
North America business, generally three to six months. The average monthly rig
count outside of the United States and Canada for 2002 was 732 compared to 745
for 2001, a decrease of 2%. The 2001 rig count was up 14% compared to 2000.

     Demand in the industry for new pressure control capital equipment was not
as strong during the period of 2000 through 2002 as compared to demand for
aftermarket replacement parts, due to the low level of rig construction and
refurbishment worldwide. However, in August 2000, our pressure control segment
received an order for a blowout preventer multiplex control system, which was
delivered in August 2001. 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

                                        16
<PAGE>

Diamond Offshore Drilling, Inc. for blowout preventer multiplex control systems.
During 2002, we benefited from these orders as revenue and gross profit was
recognized using the percentage-of-completion accounting method and significant
progress was made during the year. Several systems were completed during 2002
and delivery of the remaining systems is expected during 2003.

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 2002, 84% 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.

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 last in, first out
inventory valuation adjustments. 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.

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

                                        17
<PAGE>

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.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

REVENUE

     Total revenue increased $59.6 million, or 33%, to $239.6 million for 2001
from $180.0 million in 2000. Premium connection revenue rose 46% to $138.9
million and pressure control revenue increased 18% to $100.7 million. The
increase in premium connection revenue was primarily the result of increased
demand for our products as a result of higher rig counts in both our North
American (United States and Canada) and international markets, and our expansion
of plant capacity in North America to accommodate the higher demand. The
increase in pressure control revenue was attributable to a 25% increase in
revenue from the sale of aftermarket replacement parts due to higher worldwide
rig activity, and an 11% increase in revenue from the sale of capital equipment
due to an increase in project orders received during 2001.

                                        18
<PAGE>

GROSS PROFIT

     Gross profit increased $28.0 million to $84.2 million for 2001 from $56.2
million in 2000. The increase was primarily due to an increase in revenue from
pressure control aftermarket replacement parts that generate higher margins,
increased utilization of our premium connection plants in North America,
increased profitability of our pressure control capital equipment business and
higher prices in both of our segments.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses increased $7.1 million to
$41.9 million for 2001 compared to $34.8 million for 2000. The increase was due
to higher engineering costs to support capital equipment orders, an increase in
sales agent commissions and sales expenses as a result of increased demand for
our products, and higher management incentive accruals resulting from improved
performance. As a percentage of sales, selling, general and administrative
expenses decreased from 19% for 2000 to 17% for 2001.

OPERATING INCOME

     Operating income increased $20.9 million to $42.3 million for 2001,
compared to $21.4 million for 2000. Operating income for our premium connection
segment increased 23% to $31.5 million for 2001 compared to 2000. Operating
income for our pressure control segment increased $12.6 million to $21.1 million
for 2001 from $8.5 million for 2000. Corporate and administration expenses were
$10.3 million for 2001 compared to $12.8 million in 2000.

INTEREST EXPENSE

     Interest expense decreased $0.6 million from $5.0 million for 2000 to $4.4
million for 2001 due to lower outstanding debt in 2001.

OTHER INCOME AND EXPENSE

     For 2001, other expense was $1.1 million, which 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 2000, other income was
$5.4 million, which includes a $3.6 million gain from a legal settlement related
to the purchase of put options to sell marketable securities, and a $1.9 million
gain recorded from the sale of real estate not used in operations. For further
information on these transactions, see Note 9 in the Notes to Consolidated
Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

     Our primary liquidity needs are to repay indebtedness, fund capital
expenditures, fund new product development and to provide additional working
capital. Our primary source of funds is cash flow from operations. In addition,
we have available $10 million in revolving credit facilities.

OPERATING ACTIVITIES

     Cash provided by operating activities was $28.3 million for 2002 and $45.1
million for 2001. 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. Cash provided
by operations in 2001 was $17.2 million higher than in 2000 primarily due to
improved operating results in both of our segments driven by higher revenue and
contractual cash payments from customers on project orders in backlog.

                                        19
<PAGE>

INVESTING ACTIVITIES

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

     Net cash used in investing activities for 2001 was $21.6 million higher
than 2000. The increase was due to higher capital spending and one-time cash
receipts in 2000. These one-time cash receipts included a May 2000 settlement
payment from a dispute with a financial institution related to our purchase of
put options on marketable securities. As a result of this settlement, we
received, after expenses, approximately $3.6 million. Additionally, in July
2000, we sold certain real property not used in our operations for proceeds of
approximately $2.1 million, net of expenses from the sale. For more information
on capital expenditures for the three years ended December 31, 2002 see "Capital
Expenditures" below.

CREDIT FACILITIES

     We have two unsecured revolving lines of credit for working capital
requirements that provide up to $10.0 million in total committed revolving
credit borrowings through June 30, 2003. Of these, $5.0 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 under the U.S. facility fluctuate depending on our leverage
ratio and are LIBOR plus a spread ranging from 125 to 200 basis points or prime.
Interest rates under the foreign credit line fluctuate depending on the
Company's leverage ratio and are prime plus a spread ranging from zero to 25
basis points or LIBOR plus a spread ranging from 125 to 225 basis points. At
December 31, 2002, there were no outstanding borrowings under either facility.
Our U.S. revolving credit agreement contains covenants with respect to debt
levels, tangible net worth, debt-to-capitalization and interest coverage ratios.
At December 31, 2002, 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,
2002 there was approximately $0.3 million outstanding in letters of credit.

     On March 18, 2003, the Company's domestic and foreign lines of credit were
extended to mature on June 30, 2003.

CONTRACTUAL CASH OBLIGATIONS

     The following paragraph summarizes the Company's contractual cash
obligations as of December 31, 2002.

<Table>
<Caption>
                                                     PAYMENT DUE BY PERIOD
                                           -----------------------------------------
                                           TOTAL   2003    2004   2005   2006   2007
                                           -----   -----   ----   ----   ----   ----
                                                         (IN MILLIONS)
<S>                                        <C>     <C>     <C>    <C>    <C>    <C>
Short term debt..........................  $30.0   $30.0   $ --   $ --   $ --   $ --
Operating leases.........................    3.1     1.1    0.9    0.7    0.4     --
                                           -----   -----   ----   ----   ----   ----
  Total..................................  $33.1   $31.1   $0.9   $0.7   $0.4   $ --
                                           =====   =====   ====   ====   ====   ====
</Table>

OTHER INDEBTEDNESS

     In a June 1998 private placement, we issued $60.0 million aggregate
principal amount of 6.85% senior secured notes due June 30, 2003. During 2001,
the senior notes became unsecured. The senior notes may not be prepaid prior to
maturity unless we pay the noteholders a make-whole premium based on prevailing
market interest rates. During the third quarter of 2002, the Company formally
notified the noteholders of its intent to prepay $30.0 million aggregate
principal amount of the unsecured notes. On August 6, 2002, this payment was

                                        20
<PAGE>

made plus a make-whole premium of $1.2 million. The make-whole premium was
included as interest expense in the consolidated statement of operations. If the
remaining $30.0 million were prepaid prior to June 30, 2003, an additional
make-whole premium would be required, which as of December 31, 2002 would be
$0.7 million. We anticipate having cash available at June 30, 2003 to pay the
balance of this obligation at maturity; however, depending on the facts and
circumstances at the time, we may choose to refinance all or a portion of the
remaining notes.

     The agreement under which the notes are outstanding requires us to maintain
a minimum level of tangible net worth. Additional financial tests, if not
passed, restrict our ability to incur additional indebtedness and make
acquisitions, investments and restricted payments, such as pay dividends and
repurchase capital stock. At December 31, 2002, we were in compliance with these
financial requirements. A change in control would allow the holders to require
prepayment of some or all of the notes at 100% of their principal amount plus a
make-whole premium based on prevailing market interest rates.

TECHNOLOGY

     The joint industry project to develop dual gradient drilling technology
successfully drilled a test well in the Gulf of Mexico in the fourth quarter of
2001. The joint industry project team completed its work, and during 2002,
Hydril continued to refine the design of the equipment and pursue
commercialization through its wholly-owned subsidiary, SubSea MudLift Drilling
Company, LLC. Expenditures to commercialize this technology were expensed in
2002 and were less than 5% of total selling, general and administrative
expenses.

CAPITAL EXPENDITURES

     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, $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.

     Capital expenditures for 2000 were $13.6 million, which consisted of $10.5
million for our premium connection business, primarily related to manufacturing
capacity expansion in North America, $1.8 million for our pressure control
segment, primarily for manufacturing support, and $1.3 million for general
corporate purposes.

     If current industry conditions continue, we expect our 2003 capital
expenditures to be approximately $12.0 to $13.0 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, 2002 and 2001 was
$32.5 million and $55.8 million, respectively. The decrease was the result of
work completed and revenue recognized on several large long-term capital
equipment project orders that

                                        21
<PAGE>

were received in 2001. We recognize the revenue and gross profit from pressure
control long-term projects using the percentage-of-completion accounting method,
and the remaining revenue from projects currently in backlog is expected to be
recorded during 2003. 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 are not a
meaningful measure of business prospects due to the quick turnover of such
orders.

TAX MATTERS

     As of December 31, 2002, we had deferred tax assets, net of deferred tax
liabilities, of $8.6 million, which includes foreign tax credits of
approximately $4.8 million. These assets are benefits to us as long as we expect
to have sufficient future income in the United States. The foreign tax credits
are available through the year 2006 to reduce future United States income taxes
payable.

     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

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

INVENTORIES

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

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

PRODUCT WARRANTIES

     The Company sells certain of its products to customers with a product
warranty that provides that customers can return a defective product during a
specified warranty period following the purchase in exchange for a

                                        22
<PAGE>

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

CONTINGENCIES

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

RISK FACTORS

     You should consider carefully the following risk factors and all other
information contained in this 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. 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. A
substantial or extended decline in worldwide drilling activity or in
construction or refurbishment of rigs will adversely affect the demand for our
products or services.

     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;

     - the cost of producing oil and gas;

     - interest rates and the cost of capital;

     - technological advances affecting energy consumption;

     - environmental regulation;

     - level of oil and gas inventories in storage;

     - tax policies;

     - policies of national governments; and

     - war, civil disturbances and political instability, such as the war in
       Iraq.

                                        23
<PAGE>

     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.

     AN EXTENDED WAR IN IRAQ AND 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.

     On March 19, 2003, the United States and a coalition of other countries
initiated military action in Iraq. An extended war in Iraq and the occurrence or
threat of future terrorist attacks such as those against the United States on
September 11, 2001 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 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.

     WE RELY ON A FEW DISTRIBUTORS FOR SALES OF OUR PREMIUM CONNECTIONS IN THE
UNITED STATES AND CANADA; A LOSS OF ONE OR MORE OF OUR DISTRIBUTORS OR A CHANGE
IN THE METHOD OF DISTRIBUTION COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR
PRODUCTS.

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

     In the United States, tubular distributors have combined on a rapid basis
in recent years resulting in fewer distribution alternatives for our products.
In 1999, four distributors, one of which distributed our premium connections,
combined to become one of the largest distributors of tubulars in the United
States, and the combined company no longer distributes our products. Because of
the limited number of distributors, we have few alternatives if we lose a
distributor. Identifying and utilizing additional or replacement distributors
may not be accomplished quickly and could involve significant additional costs.
Even if we find replacement distributors, the terms of new distribution
agreements may not 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 CONSOLIDATION OR LOSS OF END-USERS OF OUR PRODUCTS COULD ADVERSELY
AFFECT DEMAND FOR OUR PRODUCTS AND SERVICES AND REDUCE OUR REVENUE.

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

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

     In 2002, our largest premium connection customer worldwide accounted for
19% of segment sales, and our ten largest premium connection customers accounted
for 64% of total segment sales. In 2002, our two largest

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<PAGE>

pressure control customers accounted for 26% and 18% of segment sales and our
ten largest pressure control customers accounted for 70% of segment sales.

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

     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.

     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 2002, we derived approximately 61% of our premium connection segment
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

                                        25
<PAGE>

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.

     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 overall world demand for tubular goods;

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

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

     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
counterveiling 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.

     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

                                        26
<PAGE>

from low levels because of increased demand, our business and revenue may be
adversely affected because of either reduced sales volume or sales at lower
prices or both.

     IF WE DO NOT DEVELOP, PRODUCE AND COMMERCIALIZE NEW COMPETITIVE
TECHNOLOGIES AND PRODUCTS, OUR REVENUE MAY DECLINE.

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

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

     - successfully market new products; and

     - obtain and maintain patent protection.

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

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

     IF WE ARE NOT SUCCESSFUL IN DEVELOPING AND COMMERCIALIZING SUBSEA MUDLIFT
DRILLING TECHNOLOGY OR OTHER NEW TECHNOLOGIES OUR GROWTH PROSPECTS MAY BE
REDUCED.

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

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

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

     LIMITATIONS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
COULD CAUSE A LOSS IN REVENUE AND ANY COMPETITIVE ADVANTAGE WE HOLD.

     Some of our products and the processes we use to produce them have been
granted United States and international patent protection, or have patent
applications pending. Nevertheless, patents may not be granted from our
applications and, if patents are issued, the claims allowed may not be
sufficient to protect our

                                        27
<PAGE>

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, Neil G. Russell, our Vice President of our Premium Connection segment,
Charles E. Jones, our Vice President of our Pressure Control segment, and
Michael C. Kearney, Chief Financial Officer and Vice President--Administration.
These individuals, as well as other key employees, possess sales and marketing,
engineering, manufacturing, financial and administrative skills that are
critical to the operation of our business. We generally do not have employment
or non-competition agreements with members of our senior management or other key
employees. If we lose or suffer an extended interruption in the services of one
or more of our senior officers or other key employees, our results of operations
may be adversely affected. Moreover, we may not be able to attract and retain
qualified personnel to succeed members of our senior management and other key
employees.

     IF WE ARE UNABLE TO ATTRACT AND RETAIN SKILLED LABOR, THE RESULTS OF OUR
MANUFACTURING AND SERVICES ACTIVITIES WILL BE ADVERSELY AFFECTED.

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

     OUR INTERNATIONAL OPERATIONS MAY EXPERIENCE SEVERE INTERRUPTIONS DUE TO
POLITICAL, ECONOMIC AND OTHER RISKS.

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

     - political instability, civil disturbances, war and terrorism;

     - nationalization, expropriation, and nullification of contracts;

     - changes in regulations and labor practices;

     - changes in currency exchange rates and potential devaluations;

     - changes in currency restrictions which could limit the repatriations of
       profits or capital;

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<PAGE>

     - restrictive actions by local governments

     - seizure of plant and equipment; and

     - changes in foreign tax laws.

     We have manufacturing facilities in Warri and Port Harcourt, Nigeria and in
Batam, Indonesia. Both of these countries in recent history have experienced
civil disturbances and violence. 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 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.

     OUR QUARTERLY SALES AND EARNINGS MAY VARY SIGNIFICANTLY, WHICH COULD CAUSE
OUR STOCK PRICE TO FLUCTUATE.

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

     - the level of drilling activity worldwide;

     - the variability of customer orders, which are particularly unpredictable
       in international markets;

     - the mix of our products sold and the margins on those products;

     - new products offered and sold by us or our competitors and;

     - weather conditions that can affect our customers' operations.

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

     WE COULD BE SUBJECT TO SUBSTANTIAL LIABILITY CLAIMS, WHICH WOULD ADVERSELY
AFFECT OUR RESULTS AND FINANCIAL CONDITION.

                                        29
<PAGE>

     Most of our products are used in hazardous drilling and production
applications where an accident or a failure of a product can cause personal
injury, loss of life, damage to property, equipment or the environment, or
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.

     CHANGES IN REGULATION OR ENVIRONMENTAL COMPLIANCE COSTS AND LIABILITIES
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS AND FINANCIAL CONDITION.

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

     WE COULD BECOME SUBJECT TO CLAIMS RELATED TO THE RELEASE OF HAZARDOUS
SUBSTANCES WHICH COULD ADVERSELY AFFECT OUR RESULTS AND FINANCIAL CONDITION.

     We use and generate hazardous substances and wastes in our manufacturing
operations. In addition, many of our current and former properties are or have
been used for industrial purposes for many years. Accordingly, we could become
subject to potentially material liabilities relating to the investigation and
cleanup of contaminated properties, including property owned or leased by us now
or in the past or third party sites to which we sent waste for disposal. We also
could become subject to claims alleging personal injury or property damage as
the result of exposures to, or releases of, hazardous substances. In addition,
stricter enforcement of existing laws and regulations, the enactment of new laws
and regulations, the discovery of previously unknown contamination or the
imposition of new or increased requirements could require us to incur costs or
become the basis of new or increased liabilities that could reduce our earnings
and our cash available for operations. See Note 11 to our audited consolidated
financial statements included 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 equipment and premium
connections are complex and often deployed several miles below the earth's
surface in critical environments as well as subsea. 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.

                                        30
<PAGE>

     OUR DEBT INSTRUMENTS CONTAIN COVENANTS THAT LIMIT OUR OPERATING AND
FINANCIAL FLEXIBILITY.

     The long-term note agreement for the senior notes has one financial event
of default covenant, which is a minimum tangible net worth test. Additional
financial tests under the long-term note agreement, if not passed, restrict the
Company's ability to incur additional indebtedness or make acquisitions,
investments and restricted payments, such as pay dividends and repurchase
capital stock. Under the terms of our revolving credit facility, we must
maintain minimum levels of tangible net worth, not exceed levels of debt
specified in the agreement, comply with a fixed coverage test and not exceed a
maximum leverage ratio.

     A breach under the note agreement or our revolving credit facility could
permit the lenders to accelerate the debt so that it is immediately due and
payable. In that event, no further borrowings would be available under the
revolving credit facility. Our ability to meet the financial ratios and tests
under our revolving credit facility and our note agreement can be affected by
events beyond our control, and we may not be able to satisfy those ratios and
tests.

     EXCESS CASH IS INVESTED IN MARKETABLE SECURITIES WHICH MAY SUBJECT US TO
POTENTIAL LOSSES.

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

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS 141 prohibits the use of the
pooling-of-interest method for business combinations initiated after June 30,
2001 and also applies to all business combinations accounted for by the purchase
method that are completed after June 30, 2001. SFAS 142, effective for fiscal
years beginning after December 15, 2001, addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supercedes APB
Opinion No. 17, Intangible Assets. It addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. This statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The Company adopted SFAS 141 and 142
effective January 1, 2002, which had no material impact on our results of
operations or financial condition.

     In August and October 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" and SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets". 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 has
evaluated the provisions of SFAS 143 and expects no impact on its financial
statements from the adoption of this standard. SFAS 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. It supersedes, with exceptions, SFAS 121,
"Accounting for the Impairment of Long-Lived assets and Long-Lived Assets to be
Disposed of", and is effective for fiscal years beginning after December 15,
2001. The Company adopted SFAS 144 effective January 1, 2002, which had no
material impact on our 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

                                        31
<PAGE>

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 our 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 is currently
evaluating the impact of adopting SFAS 146; however, it does not expect the
adoption to materially affect its 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 to our audited consolidated financial statements included elsewhere
in this report 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 has adopted FASB interpretation No. 45, and does
not expect the adoption to materially affect its results of operations or
financial condition.

ITEM 7A. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

     We have short-term debt and revolving lines of credit subject to the risk
of loss associated with movements in interest rates.

     At December 31, 2002, we had $30 million of fixed rate senior notes, having
a fair value of $30.3 million. See Note 4 "Long-Term Debt" to our audited
consolidated financial statements included elsewhere in this report for
information on the $30 million prepayment on the senior notes issued in June
1998. Interest payable on the remaining balance of the notes is at a fixed-rate
and therefore, does not expose us to the risk of earnings loss due to changes in
interest rates. If interest rates were to decline 10% from their level at
December 31, 2002, the fair value of the notes would increase by $0.07 million.

     There were no outstanding borrowings under our lines of credit at December
31, 2002. 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, 2002 or 2001, we did not hedge interest rate exposure.

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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. For
2002, approximately 66% of the sales from our foreign operations were in U.S.
dollars and an additional 21% of sales from these operations 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, 2002 or 2001.

                                        33
<PAGE>

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                 HYDRIL COMPANY

                         INDEX TO FINANCIAL STATEMENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
INDEPENDENT AUDITORS' REPORT................................   35
FINANCIAL STATEMENTS:
  Consolidated Balance Sheets -- December 31, 2002 and
     2001...................................................   36
  Consolidated Statements of Operations -- Years Ended
     December 31, 2002, 2001 and 2000.......................   37
  Consolidated Statements of Changes in Stockholders'
     Equity -- Years Ended December 31, 2002, 2001 and
     2000...................................................   38
  Consolidated Statements of Cash Flows -- Years Ended
     December 31, 2002, 2001 and 2000.......................   39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................   40
</Table>

                                        34
<PAGE>

                          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, 2002 and 2001, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2002.
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,
2002 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Houston, Texas
February 21, 2003 (March 18, 2003 as to Note 4)

                                        35
<PAGE>

                                 HYDRIL COMPANY

                          CONSOLIDATED BALANCE SHEETS
             (IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2002        2001
                                                              ---------   ---------
<S>                                                           <C>         <C>
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  61,590   $  89,346
  Investments...............................................      7,899          --
  Receivables:
    Trade, less allowance for doubtful accounts: 2002,
     $1,039; 2001, $1,332...................................     35,393      36,836
    Contract costs and estimated earnings in excess of
     billings...............................................      4,829          --
    Other...................................................        396         642
                                                              ---------   ---------
         Total receivables..................................     40,618      37,478
                                                              ---------   ---------
  Inventories:
    Finished goods..........................................     22,299      33,057
    Work-in-process.........................................     13,041       9,525
    Raw materials...........................................      6,144       6,295
                                                              ---------   ---------
         Total inventories..................................     41,484      48,877
                                                              ---------   ---------
  Deferred tax asset........................................      9,164       8,566
  Other current assets......................................      3,851       2,461
                                                              ---------   ---------
         Total current assets...............................    164,606     186,728
                                                              ---------   ---------
PROPERTY:
  Land and improvements.....................................     20,031      18,344
  Buildings and improvements................................     51,061      41,854
  Machinery and equipment...................................    156,175     138,064
  Construction-in-progress..................................      3,569      17,753
                                                              ---------   ---------
         Total..............................................    230,836     216,015
  Less accumulated depreciation and amortization............   (123,805)   (115,977)
                                                              ---------   ---------
         Property, net......................................    107,031     100,038
                                                              ---------   ---------
OTHER LONG-TERM ASSETS:
  Investments...............................................      1,665          --
  Deferred tax asset........................................         --       1,091
  Other assets..............................................      4,906       4,314
                                                              ---------   ---------
         TOTAL..............................................  $ 278,208   $ 292,171
                                                              =========   =========
CURRENT LIABILITIES:
  Accounts payable..........................................  $  13,723   $  23,358
  Billings in excess of contract costs and estimated
    earnings................................................      4,981      12,641
  Accrued liabilities.......................................     21,656      17,266
  Current portion of long-term debt.........................     30,000         234
  Current portion of capital leases.........................         --          52
  Income taxes payable......................................      3,763       2,449
                                                              ---------   ---------
         Total current liabilities..........................     74,123      56,000
                                                              ---------   ---------
LONG-TERM LIABILITIES:
  Long-term debt, excluding current portion.................         --      60,000
  Deferred tax liability....................................        578         411
  Other.....................................................     16,370      15,575
                                                              ---------   ---------
         Total long-term liabilities........................     16,948      75,986
                                                              ---------   ---------
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; 15,369,638 and 14,359,596 shares issued and
     outstanding at December 31, 2002 and 2001,
     respectively...........................................      7,685       7,180
    Class B common stock -- authorized, 32,000,000 shares of
     $.50 par value; 7,192,427 and 7,966,404 shares issued
     and outstanding at December 31, 2002 and 2001,
     respectively...........................................      3,596       3,983
  Additional paid in capital................................     43,898      41,033
  Retained earnings.........................................    134,481     107,989
  Accumulated other comprehensive loss......................     (2,523)         --
                                                              ---------   ---------
         Total stockholders' equity.........................    187,137     160,185
                                                              ---------   ---------
         TOTAL..............................................  $ 278,208   $ 292,171
                                                              =========   =========
</Table>

                 See notes to consolidated financial statements
                                        36
<PAGE>

                                 HYDRIL COMPANY

                     CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                     ---------------------------------------
                                                        2002          2001          2000
                                                     -----------   -----------   -----------
<S>                                                  <C>           <C>           <C>
REVENUE............................................  $   241,524   $   239,561   $   180,022
COST OF SALES......................................      150,854       155,344       123,802
                                                     -----------   -----------   -----------
GROSS PROFIT.......................................       90,670        84,217        56,220
                                                     -----------   -----------   -----------
SELLING, GENERAL & ADMINISTRATION EXPENSES
  Engineering......................................       12,912        10,338         7,033
  Sales and marketing..............................       16,773        15,174        13,205
  General and administration.......................       16,660        16,375        14,564
                                                     -----------   -----------   -----------
           Total...................................       46,345        41,887        34,802
                                                     -----------   -----------   -----------
OPERATING INCOME...................................       44,325        42,330        21,418
INTEREST EXPENSE...................................       (4,831)       (4,403)       (4,963)
INTEREST INCOME....................................        1,477         2,874         2,320
OTHER INCOME (EXPENSE):
  Gain on marketable securities....................           --            --         3,576
  Other - net......................................         (214)       (1,082)        1,857
                                                     -----------   -----------   -----------
             Total.................................         (214)       (1,082)        5,433
                                                     -----------   -----------   -----------
INCOME BEFORE INCOME TAXES.........................       40,757        39,719        24,208
PROVISION FOR INCOME TAXES.........................       14,265        14,100         8,594
                                                     -----------   -----------   -----------
NET INCOME.........................................  $    26,492   $    25,619   $    15,614
                                                     ===========   ===========   ===========
INCOME PER SHARE:
  BASIC............................................  $      1.18   $      1.15   $      0.78
  DILUTED..........................................  $      1.16   $      1.13   $      0.76
WEIGHTED AVERAGE SHARES OUTSTANDING
  BASIC............................................   22,414,111    22,210,612    20,022,607
  DILUTED..........................................   22,833,246    22,574,734    20,557,495
</Table>

                 See notes to consolidated financial statements
                                        37
<PAGE>

                                 HYDRIL COMPANY

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<Table>
<Caption>
                                                           CLASS B                                   ACCUMULATED
                                  COMMON STOCK           COMMON STOCK       ADDITIONAL                  OTHER
                               -------------------   --------------------    PAID IN     RETAINED   COMPREHENSIVE
                                 SHARES     AMOUNT     SHARES     AMOUNT     CAPITAL     EARNINGS       LOSS         TOTAL
                               ----------   ------   ----------   -------   ----------   --------   -------------   --------
<S>                            <C>          <C>      <C>          <C>       <C>          <C>        <C>             <C>
Balance, December 31, 1999...          --   $        19,379,040   $9,690     $           $ 66,756      $    --      $ 76,446
                               ==========   ======   ==========   =======    =======     ========      =======      ========
Comprehensive Income:
  Net Income.................          --   $  --            --   $   --          --     $ 15,614      $    --      $ 15,614
                               ----------   ------   ----------   -------    -------     --------      -------      --------
         Total Comprehensive
           Income............          --      --            --       --          --       15,614           --        15,614
                               ----------   ------   ----------   -------    -------     --------      -------      --------
Shares sold by existing
  stockholders in initial
  public offering............   5,927,332   2,965    (5,927,332)  (2,965)         --           --           --            --
Issuance of Common stock in
  initial public offering....   2,673,068   1,336            --       --      38,333           --           --        39,669
Conversion of Class B Common
  stock to Common stock......      40,800      20       (40,800)     (20)         --           --      $    --            --
                               ----------   ------   ----------   -------    -------     --------      -------      --------
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            --       --       2,514           --           --         2,629
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            --       --       2,780           --           --         2,888
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
                               ==========   ======   ==========   =======    =======     ========      =======      ========
</Table>

                 See notes to consolidated financial statements
                                        38
<PAGE>

                                 HYDRIL COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2002       2001       2000
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................  $ 26,492   $ 25,619   $ 15,614
                                                              --------   --------   --------
  Adjustments to reconcile net income to net cash provided
    by operating activities:
    Depreciation............................................    10,827      9,207      8,579
    Deferred income taxes...................................     2,020      5,200      3,213
    Provision for doubtful accounts.........................      (136)       191        178
    Loss on asset disposition...............................        --         --        626
    Gain on sale of real estate holdings not used in
     operations.............................................        --         --     (1,870)
    Gain on put mediation settlement........................        --         --     (3,576)
    Change in operating assets and liabilities:
      Receivables...........................................     1,825      1,113     (6,066)
      Contract costs and estimated earnings in excess of
       billings.............................................    (4,829)     1,227      6,889
      Inventories...........................................     7,393     (8,730)     5,264
      Other current and noncurrent assets...................    (1,939)     1,515       (895)
      Accounts payable......................................    (9,635)       828      8,206
      Billings in excess of contract costs and estimated
       earnings.............................................    (7,660)     8,578     (3,243)
      Accrued liabilities...................................     1,867       (707)    (2,796)
      Income taxes payable..................................     1,314      1,052        237
      Other long-term liabilities...........................       795         26     (2,462)
                                                              --------   --------   --------
         Net cash provided by operating activities..........    28,334     45,119     27,898
                                                              --------   --------   --------
NET CASH FROM INVESTING ACTIVITIES:
  Proceeds from sale of real estate holdings not used in
    operations..............................................        --         --      2,100
  Proceeds from disposition of assets.......................        --         --         42
  Proceeds from put mediation settlement....................        --         --      3,576
  Net purchase of held-to-maturity investments..............    (9,564)        --         --
  Capital expenditures......................................   (17,928)   (29,525)   (13,575)
                                                              --------   --------   --------
         Net cash used in investing activities..............   (27,492)   (29,525)    (7,857)
                                                              --------   --------   --------
NET CASH FROM FINANCING ACTIVITIES:
  Proceeds from borrowings..................................        --      1,095      2,697
  Repayment of debt.........................................   (30,234)    (1,628)   (15,149)
  Repayment of capital leases...............................       (52)      (267)      (254)
  Net proceeds from issuance of common stock................       185         86         --
  Net proceeds from exercise of stock options...............     1,503      1,187         --
  Net proceeds from initial public offering of common
    stock...................................................        --         --     39,669
                                                              --------   --------   --------
         Net cash provided by (used in) financing
           activities.......................................   (28,598)       473     26,963
                                                              --------   --------   --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........   (27,756)    16,067     47,004
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............    89,346     73,279     26,275
                                                              --------   --------   --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................  $ 61,590   $ 89,346   $ 73,279
                                                              --------   --------   --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid.............................................  $  4,700   $  4,247   $  5,025
  Income taxes paid:
    Domestic................................................     2,043        474        195
    Foreign.................................................     6,715      5,252      3,930
</Table>

                 See notes to consolidated financial statements
                                        39
<PAGE>

                                 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 was anticipated to have an
estimated loss, such loss would be recognized in the period in which the loss
becomes apparent. It is at least reasonably possible that estimates of contract
costs could be revised in the near term. Revenue from long-term contracts was
approximately 16%, 8% and 8% of total revenue for the years ended December 31,
2002, 2001 and 2000, 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, 2002, the Company held $9,564,000 of corporate
investment securities. Contractual maturities of these securities include
$7,899,000 which mature in 2003 and $1,665,000 which mature in 2004. The fair
value of these securities as of December 31, 2002 approximates the carrying
value.

     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, 2002, 2001 and 2000 is as follows:

<Table>
<Caption>
                                                            2002     2001      2000
                                                           ------   -------   ------
                                                                (IN THOUSANDS)
<S>                                                        <C>      <C>       <C>
Beginning balance........................................  $1,332   $ 2,706   $3,710
Additions charged to expense.............................     289       191      178
Accounts written off.....................................    (103)   (1,125)    (569)
Other adjustments........................................    (479)     (440)    (613)
                                                           ------   -------   ------
Ending balance...........................................  $1,039   $ 1,332   $2,706
                                                           ======   =======   ======
</Table>

                                        40
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 85% and 81% of total gross inventories
at December 31, 2002 and 2001, 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 $13,263,000, $12,083,000 and
$11,895,000 higher at December 31, 2002, 2001 and 2000, 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, 2002,
2001 and 2000 is as follows:

<Table>
<Caption>
                                                         2002      2001      2000
                                                        -------   -------   -------
                                                              (IN THOUSANDS)
<S>                                                     <C>       <C>       <C>
Beginning balance.....................................  $ 8,167   $ 6,511   $ 6,386
Provision for excess and obsolete inventory...........    4,248     3,815     1,189
Inventory disposed of during the year.................   (4,194)   (2,159)   (1,064)
                                                        -------   -------   -------
Ending balance........................................  $ 8,221   $ 8,167   $ 6,511
                                                        =======   =======   =======
</Table>

     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:

<Table>
<S>                                                     <C>
Buildings and improvements............................  20-45 years
Machinery and equipment...............................  3-12 years
</Table>

     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, 2002 and 2001 are $2,641,000 and $2,671,000 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.

     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. Some of these activities are conducted with other

                                        41
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

industry participants who reimburse the Company for costs incurred by the
Company on their behalf. 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 $3,906,000, $2,115,000 and
$1,430,000, for the years ended December 31, 2002, 2001 and 2000, 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.

                                        42
<PAGE>
                                 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, 2002
and 2001 consisted of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2002      2001
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Accrued liabilities:
  Accrued payroll, bonus and related........................  $ 5,277   $ 3,857
  Employee benefits.........................................    5,858     3,237
  Product warranties........................................    3,274     3,224
  Taxes (property, sales, payroll, other)...................    4,586     3,069
  Other.....................................................    2,661     3,879
                                                              -------   -------
           Total............................................  $21,656   $17,266
                                                              =======   =======
Other long-term liabilities:
  Post retirement health and life benefits..................  $ 9,122   $ 9,648
  Pension plan benefits.....................................    6,100     5,723
  Deferred compensation.....................................    1,148       204
                                                              -------   -------
           Total............................................  $16,370   $15,575
                                                              =======   =======
</Table>

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

<Table>
<Caption>
                                                          2002     2001      2000
                                                         ------   -------   -------
                                                               (IN THOUSANDS)
<S>                                                      <C>      <C>       <C>
Beginning balance......................................  $3,224   $ 3,934   $ 8,034
Claims paid............................................    (690)   (3,744)   (5,609)
Additional warranty charged to expense.................     740     3,034     1,509
                                                         ------   -------   -------
Ending balance.........................................  $3,274   $ 3,224   $ 3,934
                                                         ======   =======   =======
</Table>

3. LONG-TERM CONTRACTS

     The components of long-term contracts as of December 31, 2002 and 2001
consist of the following:

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Costs and estimated earnings on uncompleted contracts.......  $ 48,417   $  8,993
Less: billings to date......................................   (48,569)   (21,634)
                                                              --------   --------
Excess of billings over costs and estimated earnings........  $   (152)  $(12,641)
                                                              ========   ========
Included in the accompanying balance sheets under the
  following captions:
  Contract costs and estimated earnings in excess of
     billings...............................................  $  4,829   $     --
  Billings in excess of contract costs and estimated
     earnings...............................................    (4,981)   (12,641)
                                                              --------   --------
           Total............................................  $   (152)  $(12,641)
                                                              ========   ========
</Table>

     Beginning in 1996 and through 1999, the Company entered into 17 fixed-price
contracts to provide pressure control equipment and subsea control systems for
pressure control equipment. All of the subsea control systems and all of the
pressure control equipment for these contracts were shipped prior to December
31, 2000. Losses

                                        43
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

incurred on these projects, including late delivery penalties, were
approximately $1,500,000 for the year ended December 31, 2000. No such losses
were recorded in 2002 or 2001.

4. LONG-TERM DEBT

     The Company's borrowings as of December 31, 2002 and 2001 were as follows:

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              ------------------
                                                                2002      2001
                                                              --------   -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Senior notes................................................  $ 30,000   $60,000
IBM note financing..........................................        --       234
                                                              --------   -------
           Total............................................    30,000    60,234
Less current portion........................................   (30,000)     (234)
                                                              --------   -------
           Total long-term debt.............................  $     --   $60,000
                                                              ========   =======
</Table>

     Senior notes -- On June 26, 1998, the Company issued $60,000,000 in senior
notes due June 30, 2003. The notes bear interest at a rate of 6.85% payable
quarterly. The senior notes may not be prepaid prior to maturity unless the
Company pays the noteholders a make-whole premium based on prevailing market
interest rates. During the third quarter of 2002, the Company formally notified
the noteholders of its intent to prepay $30,000,000 aggregate principal amount
of the unsecured notes. On August 6, 2002, this payment was made, 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. If the remaining $30,000,000 were prepaid prior to June 30, 2003, an
additional make-whole premium would be required, which as of December 31, 2002
would be $763,000.

     Revolving lines of credit -- At December 31, 2002, the Company had
available $10,000,000 in total committed unsecured revolving lines of credit. Of
this, $5,000,000 relates to the Company's U.S. operations and $5,000,000 relates
to the Company's foreign operations. Effective July 31, 2002, the Company
decreased the amount available on its U.S. line of credit from $25,000,000 to
$5,000,000. 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 LIBOR plus a spread ranging from 125 to 200
basis points or prime. At December 31, 2002, there were no outstanding
borrowings under this credit facility.

     Additionally, effective July 31, 2002, the Company decreased the amount
available on its foreign facility from $10,000,000 to $5,000,000. 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 plus a spread ranging from zero to 25 basis points
or LIBOR plus a spread ranging from 125 to 225 basis points. At December 31,
2002, there were no outstanding borrowings under this facility.

     On March 18, 2003, the Company's domestic and foreign lines of credit were
extended to mature on June 30, 2003.

     The Company previously had an uncommitted foreign line of credit for
$4,000,000 which could be terminated at the Company's or the bank's discretion.
During August 2002, this facility was terminated at the Company's request.

     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,
2002 there was approximately $322,000 outstanding in letters of credit.

                                        44
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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. The long-term note agreement for the senior notes has
one financial event of default covenant, which is a minimum tangible net worth
test. Additional financial tests under the long-term note agreement, if not
passed, restrict the Company's ability to incur additional indebtedness or make
acquisitions, investments and restricted payments, such as pay dividends and
repurchase capital stock. At December 31, 2002, the Company was in compliance
with these covenants.

     Collateral -- During 2001, the Company amended its domestic revolving line
of credit. The amendment, among other things, changed the credit facility from
secured to unsecured. Concurrently, the senior notes became unsecured pursuant
to the terms of the collateral agency and intercreditor agreement with the
noteholders and the lenders under the domestic credit facility.

     IBM note financing -- The Company financed certain equipment and completed
consulting agreements with IBM over a five-year period beginning June 1997. The
notes bore interest at 4.90% -- 7.61% per annum. During 2002, the final payments
were made on this obligation.

     Debt maturities -- The estimated remaining principal payments on the
outstanding debt as of December 31, 2002 are as follows: (in thousands)

<Table>
<Caption>
DEBT MATURITIES                                            TOTAL
---------------                                           -------
<S>                                                       <C>
2003....................................................  $30,000
                                                          -------
           Total........................................  $30,000
                                                          =======
</Table>

5. INCOME TAXES

     The geographical sources of income before income taxes for the years ended
December 31, 2002, 2001 and 2000 were as follows:

<Table>
<Caption>
                                                        2002      2001      2000
                                                       -------   -------   -------
                                                             (IN THOUSANDS)
<S>                                                    <C>       <C>       <C>
United States........................................  $16,337   $20,172   $11,149
Foreign..............................................   24,420    19,547    13,059
                                                       -------   -------   -------
Income before income taxes...........................  $40,757   $39,719   $24,208
                                                       =======   =======   =======
</Table>

                                        45
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The provision (benefit) for income taxes for the years ended December 31,
2002, 2001 and 2000 consisted of the following:

<Table>
<Caption>
                                                         2002      2001      2000
                                                        -------   -------   ------
                                                              (IN THOUSANDS)
<S>                                                     <C>       <C>       <C>
United States:
     Current..........................................  $ 4,496   $ 2,732   $   66
     Deferred.........................................    1,482     4,810    3,286
Foreign:
     Current..........................................    7,749     6,168    5,315
     Deferred.........................................      538       390      (73)
                                                        -------   -------   ------
           Total......................................  $14,265   $14,100   $8,594
                                                        =======   =======   ======
</Table>

     The consolidated effective income tax rates (as a percentage of income
before income taxes) for the years ended December 31, 2002, 2001 and 2000 varies
from the United States statutory income tax rate for the reasons set forth
below:

<Table>
<Caption>
                                                             2002     2001     2000
                                                             ----     ----     ----
<S>                                                          <C>      <C>      <C>
Statutory rate.............................................  35.0%    35.0%    35.0%
Nondeductible expenses.....................................   0.7%     0.2%     0.3%
Other......................................................  (0.7)%    0.3%     0.2%
                                                             ----     ----     ----
Effective Rate.............................................  35.0%    35.5%    35.5%
                                                             ====     ====     ====
</Table>

     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, 2002 and 2001 were as
follows:

<Table>
<Caption>
                                                                2002       2001
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Deferred tax assets:
Inventory capitalization cost...............................  $  4,086   $  3,290
Accrued expenses and other items not deductible for tax
  purposes..................................................    10,105     10,071
Net operating loss carryforward.............................        --        220
Alternative minimum tax credits.............................        --        743
Foreign tax credits.........................................     4,833      7,689
Other.......................................................     1,404      1,158
                                                              --------   --------
           Total deferred tax assets........................    20,428     23,171
Deferred tax liabilities:
Property, plant and equipment...............................    (4,280)    (3,872)
Unrepatriated foreign earnings..............................    (7,562)   (10,053)
                                                              --------   --------
           Total deferred tax liability.....................   (11,842)   (13,925)
                                                              --------   --------
Net deferred tax asset......................................  $  8,586   $  9,246
                                                              ========   ========
</Table>

     At December 31, 2002, the Company had approximately $4,833,000 of foreign
tax credits which are available to reduce future U.S. income taxes payable, if
any, through the year 2006.

                                        46
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 were 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 July 1, 1997, who have
retired under one of the Company's pension plans.

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

<Table>
<Caption>
                                                                              POST RETIREMENT
                                                     PENSION BENEFITS    HEALTH AND LIFE BENEFITS
                                                     -----------------   -------------------------
                                                      2002      2001        2002          2001
                                                     -------   -------   ----------    -----------
                                                                    (IN THOUSANDS)
<S>                                                  <C>       <C>       <C>           <C>
Change in benefit obligation:
Benefit obligation at beginning of year............  $24,459   $23,308    $ 6,709       $  6,555
  Service cost.....................................       --     1,343         59             55
  Interest cost....................................    1,662     1,766        497            463
  Participant contributions........................       --        --         55             55
  Plan amendments..................................      167        --         --             --
  Curtailment (gain)/loss..........................       --    (5,795)        --             --
  Benefits paid....................................     (522)     (484)      (855)          (610)
  Actuarial (gain)/loss............................    1,302     4,321      1,184            191
                                                     -------   -------    -------       --------
           Benefit obligation at end of year.......  $27,068   $24,459    $ 7,649       $  6,709
                                                     =======   =======    =======       ========
Change in plan Assets:
Fair value of plan assets at beginning of year.....  $18,730   $15,903    $    --       $     --
  Actual return on plan assets.....................   (1,382)      595         --             --
  Employer contributions...........................    1,650     2,732        800            555
  Participant contributions........................       --        --         55             55
  Benefits paid....................................     (522)     (484)      (855)          (610)
  Administrative expenses..........................      (21)      (16)        --             --
                                                     -------   -------    -------       --------
           Fair value of plan assets at end of
             year..................................  $18,455   $18,730    $     0       $      0
                                                     =======   =======    =======       ========
Reconciliation of plan funded status:
  Funded status....................................  $(8,614)  $(5,729)   $(7,649)      $ (6,709)
  Unrecognized actuarial (gain)/loss...............       --        44      1,142            164
  Unamortized prior service cost...................       --        --     (3,115)        (3,603)
                                                     -------   -------    -------       --------
           Net amount recognized at year-end.......  $(8,614)  $(5,685)   $(9,622)      $(10,148)
                                                     =======   =======    =======       ========
</Table>

                                        47
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                            POST RETIREMENT
                                               PENSION BENEFITS         HEALTH AND LIFE BENEFITS
                                          ---------------------------   ------------------------
                                           2002      2001      2000      2002     2001     2000
                                          -------   -------   -------   ------   ------   ------
                                                              (IN THOUSANDS)
<S>                                       <C>       <C>       <C>       <C>      <C>      <C>
Components of net periodic benefit cost
  Service cost..........................  $    --   $ 1,342   $ 1,245   $  58    $  55    $  50
  Interest cost.........................    1,662     1,766     1,533     497      463      489
  Expected return on plan assets........   (1,525)   (1,588)   (1,057)     --       --       --
  Amortization of prior service cost....       16        (9)       (9)   (488)    (488)    (488)
  Amortization of transition
     obligation.........................       --       193       193      --       --       --
  Recognized actuarial gain.............       --        --        --      --       --       --
                                          -------   -------   -------   -----    -----    -----
           Net periodic cost............  $   153   $ 1,704   $ 1,905   $  67    $  30    $  51
                                          =======   =======   =======   =====    =====    =====
Additional loss (gain) recognized due
  to:
  Curtailment...........................  $    --   $   185   $    --   $  --    $  --    $  --
                                          =======   =======   =======   =====    =====    =====
</Table>

     The assumed discount rate used in determining the benefit obligation was
6.50% at December 31, 2002. The assumed discount rate and salary increase rate
used at December 31, 2001 and 2000 were 6.75% and 4.50% and 7.50% and 4.50%,
respectively. The expected long-term rate of return on pension plan assets at
December 31, 2002, 2001 and 2000 was 8%, 9% and 9%, respectively.

     A 10% annual rate of increase in the per capita cost of pre-age 65 covered
health care benefits was assumed for 2002 in determining the benefit obligation
for the post retirement health and life plan. This rate is assumed to decrease
gradually to 5% for 2008 and remain at that level thereafter. A 12% annual rate
of increase in the per capita cost of post-age 65 covered health care benefits
was assumed for 2002 in determining the benefit obligation for the post
retirement health and life plan. This rate is assumed to decrease gradually to
5% for 2010 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:

<Table>
<Caption>
                                                                  ONE PERCENT
                                                              -------------------
                                                              INCREASE   DECREASE
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Effect on total of service and interest cost components for
  2002......................................................    $  7      $  (7)
Effect on December 31, 2002 benefit obligation..............     110       (105)
</Table>

     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 $918,000, $859,000
and $793,000 in 2002, 2001 and 2000, 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 2002, the Company's contributions were
$1,707,000.

     Nonqualified Deferred Compensation Arrangement -- Effective April 1, 2001,
the Company implemented the Hydril Company Restoration Plan, a nonqualified,
unfunded, deferred compensation arrangement for a select group of management or
highly compensated employees. Under the terms of the Plan, participants can
defer up to

                                        48
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2002 and 2001, 15,369,638 and 14,359,596 shares of
common stock were issued and outstanding, and 7,192,427 and 7,966,404 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 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, 2002 and 2001, 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.

     Initial Public Offering -- In October 2000, the Company completed an
initial public offering in which 8,600,000 shares of common stock were sold at
$17.00 per share. Of the 8,600,000 shares, 2,672,668 shares were sold by the
Company and 5,927,332 shares were sold by existing stockholders. The Company
received net proceeds from the offering of $39,669,000 after underwriting
discounts and commissions and other related expenses.

     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

                                        49
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     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. As of December 31, 2002 and 2001, 12,366 and 5,835
shares had been issued under this plan, respectively. In January 2003, an
additional 5,078 shares were issued for the offering period June 2002 through
December 2002.

8. OTHER COMPREHENSIVE LOSS

     SFAS 130 "Reporting Comprehensive Income" requires minimum pension
liability adjustments to be included in other comprehensive income. For the
year-ended December 31, 2002, the Company had an unfunded accumulated benefit
obligation in excess of the accrued pension expense. Accordingly, $2,523,000 was
recorded in other comprehensive income net of income tax at a rate of 35%.

9. OTHER INCOME AND EXPENSE

     Settlement Relating to 1998 Exercise of Weatherford International, Inc.
("WFI") Put Options -- In May 2000, the Company settled a dispute with the
financial institution from which it purchased put options in 1998 covering
shares of WFI common stock. As a result of this settlement, the Company
received, after expenses, $3,576,000.

                                        50
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Sale of Non-Operational Real Estate -- In September 2000, the Company
recorded a $1,900,000 gain from the sale of real estate not used in operations.

     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 2002 and 2001 includes
surplus property expenses of $360,000 and $518,000, respectively.

     Rental income/expense -- Other expense for 2000 includes rental income of
$264,000 net of rental expenses of $266,000.

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
and the assumed exercise of dilutive stock options 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.

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

<Table>
<Caption>
                                                                    WEIGHTED       NET
                                                                     AVERAGE      INCOME
                                                      NET INCOME     SHARES     PER SHARE
                                                      -----------   ---------   ----------
                                                      (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                                   <C>           <C>         <C>
FOR THE YEAR ENDED DECEMBER 31, 2000
Basic net income....................................    $15,614      20,023       $ 0.78
Effect of dilutive stock options....................         --         534           --
                                                        -------      ------       ------
Diluted net income..................................    $15,614      20,557       $ 0.76
                                                        =======      ======       ======
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
                                                        =======      ======       ======
</Table>

                                        51
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. COMMITMENTS AND CONTINGENCIES

     Leases -- The Company's lease commitments are principally for operating
facilities and equipment.

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

<Table>
<Caption>
                                                                 OPERATING
                                                               --------------
                                                               (IN THOUSANDS)
<S>                                                            <C>
2003........................................................       $1,067
2004........................................................          903
2005........................................................          734
2006........................................................          383
2007........................................................           --
Greater than five years.....................................           --
                                                                   ------
           Total minimum lease payments.....................       $3,087
                                                                   ======
</Table>

     Rental expense was $1,500,000, $1,284,000 and $1,306,000, for the years
ended December 31, 2002, 2001 and 2000, 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 was identified as one of many potentially responsible parties
at a waste disposal site in California. The Company's agreed upon share of total
site cleanup costs was approximately $303,000, which was paid in full in July
2002. This obligation had been adequately reserved for in the financial
statements and did not materially affect the Company's results of operations or
financial condition.

     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.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company's financial instruments at December 31, 2002 and 2001 consisted
of cash and cash equivalents, short-term investments, accounts receivable,
accounts payable and debt. The carrying amounts of these items (except for
long-term debt) 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.

     The fair value of long-term debt was determined by discounting cash flows
based on contractual maturities at interest rates expected to be available to
the Company. The estimated fair value and carrying amount of short-term debt at
December 31, 2002 was $30,300,000 and $30,000,000, respectively. The estimated
fair value and carrying amount of long-term debt at December 31, 2001 was
$61,007,000 and $60,234,000, respectively.

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 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

                                        52
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. During 2000, in connection
with the Company's initial public offering, the Company granted options for the
purchase of 444,000 shares of common stock to officers and key employees. Of
these options, 414,600 were granted at an exercise price of $17 per share and
29,400 at an exercise price of $18.70 per share. All options granted to officers
and employees under the 2000 plan 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 a
nonqualified stock option each year following the annual meeting of stockholders
on that number of shares of the Company's common stock such that the aggregate
fair market value of such shares equals approximately $75,000. Accordingly,
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. During 2001, each of
the Company's nonemployee directors received a grant of non-qualified stock
options to purchase 2,494 shares of common stock for a total of 17,458 shares at
an exercise price of $30.075 per share. In addition, during 2000 in connection
with the Company's initial public offering, each non-employee director was
granted a nonqualified option to purchase 4,412 shares of common stock, for an
aggregate of 26,472 shares of common stock at an exercise price of $17.00 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") provides 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 vest 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 has been reserved for grants of which 348,000 were available for
future grants at December 31, 2002. The Company does not intend to grant any
further options under the Plan. In connection with the amendment of the
Company's charter discussed in Note 7, each outstanding option for the purchase
of a share of common stock was converted into an option for the class B common
stock.

                                        53
<PAGE>
                                 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, 2002 and 2001, is presented below:

<Table>
<Caption>
                                                                      WEIGHTED AVERAGE
                                                           SHARES      EXERCISE PRICE
                                                          ---------   ----------------
<S>                                                       <C>         <C>
Outstanding December 31, 1999...........................    702,000        $ 4.37
Granted.................................................    470,472         17.11
Exercised...............................................         --            --
Forfeited...............................................         --            --
                                                          ---------
           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
                                                          =========
Options exercisable at December 31, 2000................    175,500        $ 4.37
Options exercisable at December 31, 2001................    180,569        $11.17
Options exercisable at December 31, 2002................    339,406        $15.09
</Table>

     The following table summarizes information about stock options outstanding
as of December 31, 2002:

<Table>
<Caption>
                                                                              WEIGHTED AVERAGE
  RANGE OF                  WEIGHTED AVERAGE      WEIGHTED                    EXERCISE PRICE OF
  EXERCISE                     REMAINING          AVERAGE       EXERCISABLE      EXERCISABLE
   PRICES        SHARES     CONTRACTUAL LIFE   EXERCISE PRICE     SHARES           SHARES
  --------      ---------   ----------------   --------------   -----------   -----------------
<S>             <C>         <C>                <C>              <C>           <C>
$ 4.32-$ 6.02     251,643         6.0              $ 4.36          76,142          $ 4.33
 15.04- 18.05     405,673         7.7               17.00         148,087           17.00
 18.05- 21.05     536,208         8.8               19.24         109,360           19.21
 21.05- 24.06      25,192         9.2               23.15              --              --
 24.06- 27.07     186,555         9.4               25.49              --              --
 27.07-$30.08      21,381         8.6               29.70           5,817           30.08
                ---------         ---              ------         -------          ------
                1,426,652         8.1              $17.02         339,406          $15.09
                =========         ===              ======         =======          ======
</Table>

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

     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, the
Company's net income would have been decreased by $1,661,000, $1,018,000 and
$433,000 in 2002, 2001 and 2000, respectively.

                                        54
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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, 2002, 2001 and 2000:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31
                                                       ------------------------------------
                                                          2002         2001         2000
                                                       ----------   ----------   ----------
                                                       (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                                    <C>          <C>          <C>
Net income, as reported..............................   $26,492      $25,619      $15,614
Deduct: Total stock-based employee compensation
  expense determined under the fair value based
  method for all awards, net of tax..................    (1,661)      (1,018)        (433)
                                                        -------      -------      -------
Proforma net income..................................   $24,831      $24,601      $15,181
                                                        =======      =======      =======
EARNINGS PER SHARE:
Basic -- as reported.................................   $  1.18      $  1.15      $  0.78
Basic -- proforma....................................   $  1.11      $  1.11      $  0.76
Diluted -- as reported...............................   $  1.16      $  1.13      $  0.76
Diluted -- proforma..................................   $  1.09      $  1.09      $  0.74
</Table>

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

<Table>
<Caption>
                                                           2002     2001     2000
                                                          ------   ------   ------
<S>                                                       <C>      <C>      <C>
Expected life (years)...................................    6.25     6.25     6.28
Interest rate...........................................    3.18%    4.72%    5.08%
Volatility..............................................   50.18%   50.89%   48.67%
Dividend yield..........................................       0%       0%       0%
Weighted-average fair value per share at grant date.....  $13.26   $10.79   $ 9.18
</Table>

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, Canada;
Aberdeen, Scotland; Veracruz, Mexico; Batam, Indonesia; 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 replacement parts, repair and field

                                        55
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

services for its installed base of pressure control equipment. During the year,
Hydril manufactured 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, 2002, 2001 and 2000 is as follows:

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                            ------------------------------
                                                              2002       2001       2000
                                                            --------   --------   --------
                                                                    (IN THOUSANDS)
<S>                                                         <C>        <C>        <C>
REVENUE
  Premium Connection......................................  $127,116   $138,887   $ 94,983
  Pressure Control........................................   114,408    100,674     85,039
                                                            --------   --------   --------
           Total..........................................  $241,524   $239,561   $180,022
                                                            ========   ========   ========
OPERATING INCOME (LOSS)
  Premium Connection......................................  $ 36,721   $ 31,476   $ 25,686
  Pressure Control........................................    19,721     21,168      8,542
  Corporate Administration................................   (12,117)   (10,314)   (12,810)
                                                            --------   --------   --------
           Total..........................................  $ 44,325   $ 42,330   $ 21,418
                                                            ========   ========   ========
DEPRECIATION AND AMORTIZATION
  Premium Connection......................................  $  6,686   $  5,799   $  5,208
  Pressure Control........................................     2,394      1,778      1,759
  Corporate Administration................................     1,747      1,630      1,612
                                                            --------   --------   --------
           Total..........................................  $ 10,827   $  9,207   $  8,579
                                                            ========   ========   ========
CAPITAL EXPENDITURES
  Premium Connection......................................  $  9,601   $ 18,741   $ 10,510
  Pressure Control........................................     7,138      9,169      1,748
  Corporate Administration................................     1,189      1,615      1,317
                                                            --------   --------   --------
           Total..........................................  $ 17,928   $ 29,525   $ 13,575
                                                            ========   ========   ========
TOTAL ASSETS
  Premium Connection......................................  $103,822   $103,583   $ 82,037
  Pressure Control........................................    74,394     72,244     64,241
  Corporate Administration................................    99,992    116,344    108,368
                                                            --------   --------   --------
           Total..........................................  $278,208   $292,171   $254,646
                                                            ========   ========   ========
</Table>

                                        56
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                            ------------------------------
                                                              2002       2001       2000
                                                            --------   --------   --------
<S>                                                         <C>        <C>        <C>
REVENUE
  United States...........................................  $148,857   $139,681   $119,373
  Canada and Mexico.......................................    34,008     36,180     28,112
                                                            --------   --------   --------
           Subtotal North America.........................   182,865    175,861    147,485
                                                            --------   --------   --------
  Eastern hemisphere......................................    58,659     63,700     32,537
                                                            --------   --------   --------
           Total..........................................  $241,524   $239,561   $180,022
                                                            ========   ========   ========
LONG-LIVED ASSETS
  United States...........................................  $ 86,035   $ 82,945   $ 63,358
  Canada and Mexico.......................................    14,959     11,149     11,649
                                                            --------   --------   --------
           Subtotal North America.........................  $100,994   $ 94,094   $ 75,007
                                                            --------   --------   --------
  Eastern hemisphere......................................    10,943     10,258      8,796
                                                            --------   --------   --------
           Total..........................................  $111,937   $104,352   $ 83,803
                                                            ========   ========   ========
</Table>

     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. For the years ended December 31, 2001 and 2000, no customer exceeded
10% of the Company's consolidated revenue.

15. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)

<Table>
<Caption>
                                                    YEAR ENDED DECEMBER 31, 2002
                                              ----------------------------------------
                                               FIRST    SECOND     THIRD       FOURTH
                                              QUARTER   QUARTER   QUARTER      QUARTER
                                              -------   -------   -------      -------
                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>       <C>       <C>          <C>
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(1)     6,609
Net income per share:
  Basic.....................................  $  0.25   $  0.33   $  0.31      $  0.29
  Diluted...................................  $  0.25   $  0.32   $  0.30      $  0.29
</Table>

<Table>
<Caption>
                                                    YEAR ENDED DECEMBER 31, 2001
                                              ----------------------------------------
                                               FIRST    SECOND        THIRD    FOURTH
                                              QUARTER   QUARTER      QUARTER   QUARTER
                                              -------   -------      -------   -------
                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>       <C>          <C>       <C>
Revenue:....................................  $55,522   $60,110      $66,658   $57,271
Gross profit................................   17,904    20,587       23,278    22,448
Operating income............................    8,257    10,439       12,453    11,181
Net income..................................    5,182     5,977(2)     7,569     6,891
Net income per share:
  Basic.....................................  $  0.23   $  0.27      $  0.34   $  0.31
  Diluted...................................  $  0.23   $  0.26      $  0.33   $  0.30
</Table>

                                        57
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

---------------

(1) 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.

(2) Includes $570,000 in pre-tax expenses incurred in facilitating the offering
    of common stock by certain of the Company's stockholders during the second
    quarter of 2001.

16. RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS 141 prohibits the use of the
pooling-of-interest method for business combinations initiated after June 30,
2001 and also applies to all business combinations accounted for by the purchase
method that are completed after June 30, 2001. SFAS 142, effective for fiscal
years beginning after December 15, 2001, addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supercedes APB
Opinion No. 17, Intangible Assets. It addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. This statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. The Company adopted SFAS 141 and 142
effective January 1, 2002, which had no material impact on the results of
operations or financial condition.

     In August and October 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" and SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets". 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 has
evaluated the provisions of SFAS 143 and expects no material impact on its
financial statements from the adoption of this standard. SFAS 144 addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. It supersedes, with exceptions, SFAS
121, "Accounting for the Impairment of Long-Lived assets and Long-Lived Assets
to be Disposed of", and is effective for fiscal years beginning after December
15, 2001. The Company adopted SFAS 144 effective January 1, 2002, which had no
material impact on the results of operations or financial condition.

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

                                        58
<PAGE>
                                 HYDRIL COMPANY

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 is currently evaluating the impact of adopting SFAS 146; however, it
does not expect the adoption to materially affect its 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 has adopted FASB interpretation No. 45, and does
not expect the adoption to materially affect its results of operations or
financial condition.

                                        59
<PAGE>

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

     None.

                                    PART III

     Except as indicated below, information with respect to the following items
is incorporated by reference to Hydril's definitive 2002 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 20, 2003.

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.

ITEM 11 -- EXECUTIVE COMPENSATION

     The information required by this item will be set forth under the captions
"Election of Directors -- Compensation of Directors" 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.

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 -- CONTROLS AND PROCEDURES

     Within the 90-day period prior to the filing date of this report, Hydril's
Chief Executive Officer and Chief Financial Officer have evaluated the Company's
disclosure controls and procedures, and they concluded that these controls and
procedures are effective. Subsequent to the date of that evaluation, there have
been no significant changes in internal controls or in other factors that could
significantly affect the internal controls.

                                    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.

                                        60
<PAGE>

          3. Exhibits

<Table>
<Caption>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         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*            -- Note Purchase Agreement dated as of June 25, 1998
                            (incorporated by reference to Exhibit 10.4 in the
                            Registration Statement on Form S-1 of the Company filed
                            with the Commission on June 9, 2000).
        10.2*            -- Second Amended and Restated Loan Agreement dated as of
                            August 25, 2000 among Hydril Company and Bank One, Texas,
                            N.A. (incorporated by reference to Exhibit 10.7 of
                            Amendment No. 2 to the Registration Statement on Form S-1
                            of the Company filed with the Commission on September 5,
                            2000).
        10.3*            -- First Amendment to Second Amended and Restated Loan
                            Agreement dated as of September 29, 2000 among Hydril
                            Company and Bank One, Texas, N.A. (incorporated by
                            reference to Exhibit 10.1 of the Company's Form 10-Q for
                            the quarter ended September 30, 2001).
        10.4*            -- Second Amendment to Second Amended and Restated Loan
                            Agreement dated as of September 25, 2000 among Hydril
                            Company and Bank One, N.A. (incorporated by reference to
                            Exhibit 10.2 of the Company's Form 10-Q for the quarter
                            ended September 30, 2001).
        10.5*            -- Third Amendment to Second Amended and Restated Loan
                            Agreement dated as of December 14, 2001 among Hydril
                            Company and Bank One, N.A. (incorporated by reference to
                            Exhibit 10.5 of the Company's Form 10-K for the
                            year-ended December 31, 2001).
        10.6*            -- Fourth Amendment to Second Amended and Restated Loan
                            Agreement dated as of July 31, 2002 among Hydril Company
                            and Bank One, NA. (incorporated by reference to Exhibit
                            10.1 of the Company's Form 10-Q for the quarter ended
                            June 30, 2002).
        10.7*            -- Collateral Agency and Intercreditor Agreement dated as of
                            June 25, 1998 among the Company, Principal Mutual Life
                            Insurance Company, Nippon Life Insurance Company of
                            America, and Bank One, Texas, N.A (incorporated by
                            reference to Exhibit 10.8 of Amendment No. 2 to the
                            Registration Statement on Form S-1 of the Company filed
                            with the Commission on September 5, 2000).
        10.8*            -- Amendment No. 1 to Note Purchase Agreement and Consent
                            under Intercreditor Agreement dated as of June 7, 2000
                            (incorporated by reference to Exhibit 10.9 of Amendment
                            No. 2 to the Registration Statement on Form S-1 of the
                            Company filed with the Commission on September 5, 2000).
</Table>

                                        61
<PAGE>

<Table>
<Caption>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.9*            -- Modification to Amendment No. 1 to Note Purchase
                            Agreement and Consent under Intercreditor Agreement dated
                            as of June 7, 2000 (incorporated by reference to Exhibit
                            10.10 of Amendment No. 2 to the Registration Statement on
                            Form S-1 of the Company filed with the Commission on
                            September 5, 2000).
                            Hydril is a party to several other long-term debt
                            instruments under which the total amount of long-term
                            debt securities authorized does not exceed 10% of the
                            total assets of Hydril and its subsidiaries on a
                            consolidated basis. Pursuant to paragraph 4(iii)(A) of
                            Item 601(b) of Regulation S-K, Hydril agrees to furnish a
                            copy of such instruments to the Commission upon request.
      10.10*+            -- 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).
      10.11*+            -- 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).
      10.12*+            -- 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).
      10.13*+            -- 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).
      10.14*+            -- 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).
      10.15*+            -- 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).
      10.16*+            -- 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.
</Table>

---------------

* Incorporated by reference as indicated.

+ Denotes management compensatory plan or agreement.

     Reports on Form 8-K:

          During the quarter ended December 31, 2002, no reports were filed on
     Form 8-K.

                                        62
<PAGE>

                                   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 27th day of March 2003.

                                         HYDRIL COMPANY

                                         By:      /s/ MICHAEL C. KEARNEY
                                          --------------------------------------
                                                    Michael C. Kearney
                                             Chief Financial Officer and Vice
                                                         President-
                                          Administration (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 27th day of March 2003.

<Table>
<Caption>
                 SIGNATURE                                       TITLE
                 ---------                                       -----
<C>                                           <S>
         /s/ CHRISTOPHER T. SEAVER            President, Chief Executive Officer and
--------------------------------------------    Director (Principal Executive Officer)
           Christopher T. Seaver

           /s/ MICHAEL C. KEARNEY             Chief Financial Officer and Vice
--------------------------------------------    President -- Administration (Authorized
             Michael C. Kearney                 Officer and Principal Accounting and
                                                Financial Officer)

                     *                        Chairman of the Board
--------------------------------------------
             Richard C. Seaver

                     *                        Director
--------------------------------------------
             Richard A. Archer

                     *                        Director
--------------------------------------------
                Jerry S. Cox

                     *                        Director
--------------------------------------------
            Gordon B. Crary, Jr.

                     *                        Director
--------------------------------------------
                Roger Goodan

                     *                        Director
--------------------------------------------
               Gordon T. Hall

                     *                        Director
--------------------------------------------
            Kenneth S. McCormick

                     *                        Director
--------------------------------------------
             Patrick T. Seaver

                     *                        Director
--------------------------------------------
                T. Don Stacy

                     *                        Director
--------------------------------------------
                Lew O. Ward

       *By: /s/ CHRISTOPHER T. SEAVER
--------------------------------------------
           Christopher T. Seaver
              Attorney-in-fact
</Table>

                                        63
<PAGE>

CERTIFICATIONS

I, Christopher T. Seaver, certify that:

     1. I have reviewed this annual report on Form 10-K of Hydril Company;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          (a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          (b) evaluated the effectiveness of the registrant's disclosure
     controls and procedures as of a date within 90 days prior to the filing
     date of this annual report (the "Evaluation Date"); and

          (c) presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

          (a) all significant deficiencies in the design or operation of
     internal controls which could adversely affect the registrant's ability to
     record, process, summarize and report financial data and have identified
     for the registrant's auditors any material weaknesses in internal controls;
     and

          (b) any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

                                                /s/ CHRISTOPHER T. SEAVER
                                         ---------------------------------------
                                                  Christopher T. Seaver
                                                 Chief Executive Officer

Date: March 26, 2003

                                        64
<PAGE>

I, Michael C. Kearney, certify that:

     1. I have reviewed this annual report on Form 10-K of Hydril Company;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          (a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          (b) evaluated the effectiveness of the registrant's disclosure
     controls and procedures as of a date within 90 days prior to the filing
     date of this annual report (the "Evaluation Date"); and

          (c) presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

          (a) all significant deficiencies in the design or operation of
     internal controls which could adversely affect the registrant's ability to
     record, process, summarize and report financial data and have identified
     for the registrant's auditors any material weaknesses in internal controls;
     and

          (b) any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

                                                 /s/ MICHAEL C. KEARNEY
                                         ---------------------------------------
                                                   Michael C. Kearney
                                                 Chief Financial Officer

Date: March 26, 2003

                                        65
<PAGE>

                               INDEX TO EXHIBITS

<Table>
<Caption>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         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*            -- Note Purchase Agreement dated as of June 25, 1998
                            (incorporated by reference to Exhibit 10.4 in the
                            Registration Statement on Form S-1 of the Company filed
                            with the Commission on June 9, 2000).
        10.2*            -- Second Amended and Restated Loan Agreement dated as of
                            August 25, 2000 among Hydril Company and Bank One, Texas,
                            N.A. (incorporated by reference to Exhibit 10.7 of
                            Amendment No. 2 to the Registration Statement on Form S-1
                            of the Company filed with the Commission on September 5,
                            2000).
        10.3*            -- First Amendment to Second Amended and Restated Loan
                            Agreement dated as of September 29, 2000 among Hydril
                            Company and Bank One, Texas, N.A. (incorporated by
                            reference to Exhibit 10.1 of the Company's Form 10-Q for
                            the quarter ended September 30, 2001).
        10.4*            -- Second Amendment to Second Amended and Restated Loan
                            Agreement dated as of September 25, 2000 among Hydril
                            Company and Bank One, N.A. (incorporated by reference to
                            Exhibit 10.2 of the Company's Form 10-Q for the quarter
                            ended September 30, 2001).
        10.5*            -- Third Amendment to Second Amended and Restated Loan
                            Agreement dated as of December 14, 2001 among Hydril
                            Company and Bank One, N.A. (incorporated by reference to
                            Exhibit 10.5 of the Company's Form 10-K for the
                            year-ended December 31, 2001).
        10.6*            -- Fourth Amendment to Second Amended and Restated Loan
                            Agreement dated as of July 31, 2002 among Hydril Company
                            and Bank One, NA. (incorporated by reference to Exhibit
                            10.1 of the Company's Form 10-Q for the quarter ended
                            June 30, 2002).
        10.7*            -- Collateral Agency and Intercreditor Agreement dated as of
                            June 25, 1998 among the Company, Principal Mutual Life
                            Insurance Company, Nippon Life Insurance Company of
                            America, and Bank One, Texas, N.A. (incorporated by
                            reference to Exhibit 10.8 of Amendment No. 2 to the
                            Registration Statement on Form S-1 of the Company filed
                            with the Commission on September 5, 2000).
        10.8*            -- Amendment No. 1 to Note Purchase Agreement and Consent
                            under Intercreditor Agreement dated as of June 7, 2000
                            (incorporated by reference to Exhibit 10.9 of Amendment
                            No. 2 to the Registration Statement on Form S-1 of the
                            Company filed with the Commission on September 5, 2000).
</Table>
<PAGE>

<Table>
<Caption>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.9*            -- Modification to Amendment No. 1 to Note Purchase
                            Agreement and Consent under Intercreditor Agreement dated
                            as of June 7, 2000 (incorporated by reference to Exhibit
                            10.10 of Amendment No. 2 to the Registration Statement on
                            Form S-1 of the Company filed with the Commission on
                            September 5, 2000).
                            Hydril is a party to several other long-term debt
                            instruments under which the total amount of long-term
                            debt securities authorized does not exceed 10% of the
                            total assets of Hydril and its subsidiaries on a
                            consolidated basis. Pursuant to paragraph 4(iii)(A) of
                            Item 601(b) of Regulation S-K, Hydril agrees to furnish a
                            copy of such instruments to the Commission upon request.
      10.10*+            -- 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).
      10.11*+            -- 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).
      10.12*+            -- 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).
      10.13*+            -- 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).
      10.14*+            -- 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).
      10.15*+            -- 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).
      10.16*+            -- 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.
</Table>

---------------

* Incorporated by reference as indicated.

+ Denotes management compensatory plan or agreement.