HYDRIL CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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, 2001

COMMISSION FILE NUMBER 000-31579

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

DELAWARE 95-2777268
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

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

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

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. [ ]

Aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 1, 2002: $312,868,194. 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 1, 2002:

Common stock outstanding: 14,383,009 shares

Class B common stock outstanding: 7,966,404 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 in connection with our Annual Stockholders
Meeting to be held May 21, 2002.
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HYDRIL COMPANY

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2001

INDEX

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The annual report on Form 10-K 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. 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.

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".

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 on the exploration and development of oil and gas. 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. 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.

Drilling activity was depressed in 1999 due to a reduction of capital
expenditures by oil and gas operators in response to a 1998 collapse in oil
prices. Oil prices began to recover in the second quarter of 1999 primarily
because OPEC stabilized oil prices through voluntary production limits, which
resulted in reduced oil inventories worldwide. During 1999, oil prices continued
their upward trend and stabilized early in 2000. Oil prices averaged 58% higher
in 2000 compared to 1999. This upward trend during 1999 and 2000 led to an
increase in drilling activity and the use of our products.

Natural gas prices, which affect drilling activities primarily in North
America, strengthened considerably during the 1999 through 2000 period. Average
natural gas prices rose 88% in 2000 compared to the average prices in 1999, and
peaked late in 2000 as a result of low levels of natural gas storage in the
United States. In response to these higher prices, exploration and production
companies increased their drilling budgets for natural

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gas in 2000 and 2001. These budget increases resulted in higher rig counts
drilling for natural gas, primarily in the Gulf of Mexico, which consume our
products.

During 2001, the price of natural gas began to fall due to the return of
higher levels of natural gas storage levels in the United States. Natural gas
prices in the second half of 2001 averaged 53% lower than in the first half of
2001. As a result, demand for our products in North America began to fall during
the fourth quarter of 2001. Additionally, in the second half of 2001, oil prices
began to decline. Fourth quarter 2001 average oil prices were 35% below prices
for the fourth quarter of 2000. This decline led to a reduction of drilling
activity in the United States and Canada and a resulting drop in demand for our
products.

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. 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 oil and gas
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 1997
through 2001:

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(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

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Internationally, the total rig count is a relevant indicator of the premium
connections market. The following table shows the average rig counts
internationally for land and offshore combined for each of the years 1997
through 2001:

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(1) Source: We calculated the average rig counts using monthly data published by
Baker Hughes International. 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.

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 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 in the most recent offshore rig construction up cycle,
which peaked in 1998, driven by an upturn in drilling rig utilization. However,
the level of new rig construction and demand for capital equipment declined
during the 1999 through 2001 time period, but demand for replacement parts and
equipment has been less volatile.

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 these parts and
services are primarily affected by the level of worldwide offshore drilling
activity. The following table shows the average worldwide offshore rig count for
each of the years 1997 through 2001:

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(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 International. The worldwide offshore rig count
includes data for Europe, the Middle East, Africa, Latin America, Asia
Pacific, the United States and Canada.

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
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 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 depths 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 custom-designed, 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

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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 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 26 licensed repair facilities worldwide to support our premium connection
business. Additionally, during 2000 and 2001, we completed a 50% capacity
expansion of our premium connection manufacturing facility in Nisku, Canada and
increased capacity in the United States by 30%.

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.

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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; our ram blowout preventers
feature a new compact version that is designed for both rig upgrades and
new builds where space is limited.

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.

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 with high pressures, high
flow rates and 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 know 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.

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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, 2001, we employed 41 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 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 by drilling a test well in the
Gulf of Mexico. This joint industry project was formed in 1996 and included
seven participating companies: BP, ChevronTexaco, Conoco, Diamond Offshore,
GlobalSantaFe, Schlumberger, and Hydril. Conoco was the project leader and we
were the technical leader, designer and equipment manufacturer for this joint
industry project. The project has 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 and 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 such as
horizontal wells. 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 has completed its
work and Hydril is now in the process of refining the design of the equipment
and pursuing commercialization of this technology. We have exclusive production
rights to the technology for this application for the life of the intellectual
property. We contributed approximately $2.0 million of the $49.0 million
expended for the joint industry project. Hydril will be solely responsible for
its future expenditures in connection with its efforts to commercialize the
equipment. There are other groups of companies in our industry that are also
developing competing technologies for ultra-deepwater drilling.

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Advanced Composite Tubing. At the end of 1999, we introduced an advanced
composite tubing product as a cost-effective alternative to steel pipe used in
flowlines. Our advanced composite tubing is lightweight, flexible, resistant to
corrosion and fatigue, and can be produced in spoolable lengths up to several
thousand feet. Because it can be produced in such extensive lengths, advanced
composite tubing reduces the number of connections needed and is therefore
easier to install and is less expensive than other alternatives. Advanced
composite tubing is being marketed for use in transporting oil and gas from the
wellhead to storage facilities. We plan to make additional diameter sizes and
pressure ratings available within this product line and are currently seeking
other commercial applications for this product. During 2000, we began the
initial commercial production and shipments of advanced composite tubing.
Companies with greater financial and marketing resources than us have already
developed and are selling proprietary tubing similar to our advanced composite
tubing. During 2001, we were in the process of making certain refinements to the
products and developing marketing strategies.

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 2001, we sold products and services to approximately 1,200
customers, none of which accounted for more than 10% of our consolidated
revenues.

There has been substantial consolidation in the last few years among both
oil and gas operators and drilling contractors, and additional consolidation is
probable. This 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 only the more
promising exploration and development projects from each merged entity are
likely to be pursued. The loss of 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 revenues.

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 oil and gas operators, because it is the end-users who request their
distributors to have our premium connection applied to the pipe.

In 2001, our eight distributors accounted for 71% 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 to take advantage of those
changes than we are.

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

In 2001, our two largest premium connection customers worldwide (both being
distributors), each accounted for 13% of segment sales. Additionally, in 2001
our ten largest premium connection customers accounted for 63% of total segment
sales.

Our premium connection sales staff is managed from Houston, Texas and is
located in 19 offices in the United States, Canada, Indonesia, Singapore,
Mexico, Nigeria, Eastern Europe, Venezuela, and the United Kingdom. We use
manufacturer representatives in 43 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 operators. Certain lines of our
pressure control equipment are also sold to rig manufacturers and integrators of
equipment. Aftermarket replacement parts, repair and field services are provided
to both drilling contractors and companies that rent

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pressure control equipment. In 2001, our two largest pressure control customers
accounted for 13% and 12% of segment sales. Our ten largest customers in our
pressure control segment in 2001 accounted for 56% 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 50 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 43 countries worldwide.

OUR COMPETITORS

Our products are sold in highly competitive markets. Many of our major
competitors are diversified multinational companies, and are larger and have
substantially greater financial resources, larger operating staffs and greater
budgets for marketing and research and development than us.

Premium Connection Products. In the premium connection market,
domestically we compete primarily with the Atlas Bradford product line of the
Engineered Connections segment of Grant Prideco and to a lesser extent with the
Hunting Interlock product line of Hunting PLC, the VAM product line joint
venture of Vallourec & Mannesmann and Sumitomo Metals and steel mills and
numerous other independent threaders. Internationally, we also compete with some
of our domestic competitors and with Tenaris, a marketing group which includes
Dalmine, Siderca, NKKTubes, TAVSA and TAMSA steel mills, which is 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.

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.

High levels of imports of tubulars would reduce the volume sold by domestic
producers and tend to reduce selling prices, both of which could have an adverse
impact on our business. Moreover, foreign producers of premium connections
sometimes sell their products in the United States market at prices below cost
(which is 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 industry is likely to
continue or recur. Antidumping duty orders currently cover imports of tubulars
from Argentina, Italy, Japan, Korea and Mexico, and a counterveiling duty order
currently covers imports from Italy. 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 of the United States.

9

Pressure Control Products. We have three primary competitors in the
pressure control market, the Cameron segment of Cooper Cameron, the Drilling
Equipment Sales segment of Varco International, and the Petroleum Equipment
segment of Stewart & Stevenson Services. 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, 2001, we had a total of approximately 1,500 full-time
and full-time equivalent employees. Approximately 510 of those employees were
employed by our international subsidiaries and are located outside the United
States. Subsequent to year-end, we reduced our premium connection workforce at
our manufacturing facilities in the United States. At January 31, 2002, we had a
total of approximately 1,400 full-time and full-time equivalent employees.

We are a party to two collective bargaining agreements, which applies to
approximately 67 employees located in Veracruz, Mexico and approximately 50
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 interruptions,
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 deductibles and in some cases only applies to losses in excess of
significant amounts. In such cases, we bear the risk of loss for claims below
these deductibles or amounts. We cannot assure you that our insurance coverage
will be adequate in all circumstances or against all hazards nor can we assure
you that we will be able to maintain adequate insurance coverage in the future
at commercially reasonable rates or on acceptable terms.

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

10

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 have been 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 is approximately $303,000, which we expect
to disburse during 2002. We have adequate reserves for this obligation and it
will not have a material adverse effect on our financial condition or results of
operation. 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.

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 2001, approximately 57% of our total revenues were derived from services
or equipment ultimately provided or delivered to end-users outside the United
States, and approximately 32% of our revenues were derived from products which
were produced 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 and
civil disturbances, war, 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, restrictive actions by local
governments and changes in foreign tax laws.

11

ITEM 2 -- PROPERTIES

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

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 rig 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 72 acres of additional
undeveloped land.

ITEM 3 -- LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote by stockholders during the quarter
ended December 31, 2001.

12

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

The following table provides information regarding our executive officers
as of December 31, 2001.

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 and a director
and a member of the executive committee of the National Ocean Industries
Association. Prior to joining Hydril, Mr. Seaver was a corporate and securities
attorney for Paul, Hastings, Janofsky & Walker, and was a Foreign Service
Officer in the U.S. Department of State, with postings in Kinshasa, Congo and
Bogota, Colombia.

Charles E. 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 had 23 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.

13

PART II

ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock has been traded on the Nasdaq National Market under the
symbol "HYDL" since September 27, 2000. The following table shows the high and
low sale prices of our common stock as reported by the Nasdaq National Market
for 2001 and the third and fourth quarter of 2000.

As of December 31, 2001, there were nine holders of record of our common
stock and the closing sales price per share of our common stock as reported by
the Nasdaq National Market was $17.63. Based on inquiries made in connection
with preparations for our 2002 Annual Meeting of Stockholders, Hydril estimates
that there are at least 2,300 beneficial holders of our common stock.
Additionally, there were 44 holders of record of our class B common stock as of
December 31, 2001.

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. Gross proceeds to Hydril were $45.4 million and gross
proceeds to the selling stockholders were $100.8 million. In connection with
this offering, Hydril incurred $3.2 million in underwriting discounts and
commissions, and $2.6 million in other related expenses. 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 $16.3 million of the proceeds
for the initial costs to expand capacity at our premium connection facilities in
the United States and Canada, $7.2 million to upgrade machinery and equipment in
our Houston pressure control plants and $2.6 million for the expansion of our
advanced composite tubing production and development and commercialization of
our subsea mudlift drilling technology. The balance of the proceeds to Hydril
($13.5 million at December 31, 2001) is invested in various high-grade
securities and money market accounts and will be used to complete approved
capital expenditures that are currently in progress to expand our capacity to
produce premium connections, upgrade machine tools that we use in the
manufacturing of our pressure control products and commercialize our subsea
mudlift drilling technology.

14

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.

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

(1) We sold our Singapore manufacturing facility for $6.2 million in cash in
1997, resulting in a pre-tax gain of approximately $4.5 million.

(2) Results of operations include $26.5 million of operating losses in 1997,
$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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

(3) Other income for 1997 was comprised primarily of a gain on the sale of our
interest in XLS Holding, Inc. We obtained a 50% interest in XLS Holding,
Inc. in 1994 as a result of our settlement of litigation with

15

XL Systems, Inc. and in consideration for our licensing to XL Systems of
several of our patented thread connections. Our interest in XLS Holding was
accounted for using the equity method. In 1997, we sold our 50% interest in
XLS Holding to Weatherford International in exchange for Weatherford stock
and recorded a pre-tax gain of $18.5 million.

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

(5) 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.

(6) Includes $570,000 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.

(7) 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.

(8) 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.

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 Form 10-K.

OVERVIEW

We are engaged worldwide in engineering, manufacturing and marketing
premium connections and pressure control products used for 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. Oil and gas prices are affected by
numerous factors, including the level of worldwide oil and gas exploration and
production activity, and worldwide supply and demand for energy, which is
affected by worldwide economic conditions. Additional factors include the
policies of the Organization of Petroleum Exporting Countries, or OPEC, the cost
of producing oil and gas, environmental regulation, tax policies and policies of
national governments, interest rates, technological advances affecting energy
consumption, and the cost of capital.

Our premium connection products are marketed primarily to oil and gas
operators. Sales of premium connection products are driven by the level of
worldwide drilling activity, in particular the number of rigs drilling over
15,000 feet and the number of rigs drilling in water depths greater than 1,500
feet. 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.
The main factors that affect sales of 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.

Beginning in late 1996, stabilization of oil and gas prices fueled
increased drilling activity, the construction of new drilling rigs and the
upgrade of many existing drilling rigs. During this period of increasing
activity, we

16

expanded our premium connection production capacity and refurbished machine
tools used in many of our premium connection plants. From 1997 to mid-1999, we
spent $18.1 million to construct new premium connection manufacturing facilities
in Indonesia and Mexico, and to expand and upgrade an existing premium
connection manufacturing facility in Houston, Texas that had been idle since
1986. Additionally, we implemented an enterprise resource planning information
system in 1998 at a cost of $6.1 million.

During the period beginning in 1996 and through 1999, we entered into
long-term, fixed-price contracts to manufacture and deliver pressure control
equipment and subsea control systems for pressure control equipment. We incurred
operating losses, including late delivery penalties, of $26.5 million in 1997,
$27.5 million in 1998, $3.7 million in 1999, and $1.5 million in 2000 relating
to these fixed-price contracts. These contracts did not allow us to recoup all
of our expenses from the design, development and production of these control
systems which had no prior prototypes. As of December 31, 2000, all of the
subsea control systems and all of the pressure control equipment under these
fixed price contracts had been shipped. We did not incur any operating losses in
2001 and do not expect to incur any additional operating losses in connection
with these fixed price contracts.

In the second half of 1998, the price of oil began to fall and reached
levels as low as $10.78 per barrel for West Texas Intermediate crude compared to
over $25.00 per barrel in early 1997. The downturn in oil prices led our
customers to substantially curtail their drilling and exploration activity, as
well as the construction and refurbishment of drilling rigs, during the second
half of 1998 through 1999. The rig count in the United States and Canada, as
measured by Baker Hughes, fell from 1,481 rigs in February 1998 to a low of 558
rigs in April 1999. The rig count outside of the United States and Canada fell
from 819 rigs in January 1998 to a low of 556 rigs in August 1999. This resulted
in substantially lower purchases of premium connections and pressure control
equipment. In response to this lower demand for our products and services,
during 1999 we reduced our workforce in the United States by approximately 325
employees, or 20% of our total work force.

From mid-1999 to mid-2000, 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 United States
average monthly rig count for 2000 was 916 rigs, as measured by Baker Hughes, a
51% increase over the average monthly rig count for 1999 of 608 rigs. The
average monthly Canadian rig count for 2000 was 344, an increase of 40% over the
average monthly Canadian count of 246 rigs for 1999. Rig counts continued to
improve during the first half of 2001 with the United States rig count peaking
at 1,293 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. The decline in commodity prices led to a
decline in drilling in North America, 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 from
1,631 in July 2001 to 1,085 in December 2001, a 33% decrease. At the end of
February 2002, the United States rig count declined 12% to 782 from 887 at the
end of 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.

Internationally, our premium connection business has not been impacted by
the decline in rig counts experienced in North America during 2001. Our
international business generally has longer lead times than our North America
business, typically four to six months. The average monthly rig count outside of
the United States

17

and Canada for 2001 was 745, compared to 652 for 2000, an increase of 14%. The
2000 rig count was up 11% compared to 1999. At the end of February 2002, the
international rig count was at 716.

Demand in the industry for new pressure control capital equipment was not
as strong during 2000 and 2001 compared to demand for premium connections and
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, on time and at projected cost. In March 2001, our
pressure control segment received a $37 million order for four offshore drilling
blowout prevention and control systems from GlobalSantaFe Corporation.
Deliveries are expected to begin in the second quarter of 2002 and continue into
late 2003. In addition, during 2001 we received two orders from a subsidiary of
Diamond Offshore Drilling, Inc. for blowout preventer multiplex control systems.
Deliveries of these systems are expected in the fourth quarter of 2002 and
second quarter of 2003. The revenue and gross profit from these orders are being
recognized using the percentage-of-completion accounting method.

During 2001, approximately 57% of our revenues were derived from equipment
sales and services ultimately provided to end-users for use outside of the
United States and approximately 32% of our revenues were derived from products
that were produced outside of the United States.

REVENUES

With the exception of revenues from pressure control long-term projects, we
record revenues for all products and services at the time such products are
delivered or services are provided. In 2001, 92% of our revenues were 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 revenues 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 revenues 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 revenues. 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

18

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, 2001 AND 2000

REVENUES

Total revenues increased $59.5 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
revenues from the sale of aftermarket replacement parts due to higher worldwide
rig activity, and an 11% increase in revenues from the sale of capital equipment
due to an increase in project orders received during 2001.

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 revenues 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 8 in the Notes to Consolidated
Financial Statements.

19

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

REVENUES

Total revenues increased $20.6 million, or 13%, to $180.0 million for 2000
from $159.4 in 1999. Premium connection revenue rose 26% to $95.0 million and
pressure control revenue increased slightly from $84.1 million to $85.0 million.
The increase in premium connection revenue was due to the increased demand in
the North American (United States and Canada) market, for which sales revenues
for 2000 increased 67% compared to 1999. The increase in pressure control
revenue is attributable to a 20% increase in revenues from aftermarket products,
which was partially offset by a 15% decrease in revenues from capital equipment.
In 2000, the product mix in the pressure control segment shifted toward
aftermarket parts from capital equipment compared with 1999 due to fewer rigs
under construction or being refurbished. Revenue from capital equipment
decreased in 2000 compared to 1999 due to the completion of long-term capital
projects received in the last rig construction and refurbishment upcycle.

GROSS PROFIT

Gross profit increased $30.5 million to $56.2 million for 2000 from $25.7
million in 1999. The increase in gross profit was due in part to a $10.5 million
charge in 1999 to replace some of our pressure control equipment due to welds
that did not meet company standards. Also contributing to the higher gross
margin was a shift in the pressure control product sales mix from lower margin
capital equipment to higher margin aftermarket replacement parts. During the
fourth quarter of 2000, final installation and customer acceptance of capital
equipment for several long-term projects generated higher than anticipated
operating margins. For premium connections, higher gross margins resulted from
higher plant production and sales volumes in the United States and Canada, and
price increases in the United States during 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased $1.4 million to
$34.8 million for 2000 compared to $33.4 million for 1999. The increase is due
to higher professional service expense and management incentive expense accruals
resulting from improved performance. As a percentage of sales, selling, general
and administrative expenses decreased from 21% for 1999 to 19% for 2000.

OPERATING INCOME

Operating income was $21.4 million for 2000, compared to an operating loss
of $7.7 million in 1999. Operating income for our premium connection segment
increased 40% to $25.7 million for 2000 compared to 1999. Operating income for
our pressure control segment increased to $8.5 million for 2000 from a loss of
$16.2 million for 1999. Corporate and administration expenses were $12.8 million
for 2000 compared to $9.8 million in 1999.

INTEREST EXPENSE

Interest expense decreased $.5 million from $5.5 million for 1999 to $5.0
million for 2000 due to the reduction of outstanding debt resulting from cash
generated from operations.

OTHER INCOME AND EXPENSE

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 1999, other income was $1.0 million, which
included a gain on the sale of surplus property of $0.7 million and a gain on
the sale of marketable securities of $0.3 million. For further information on
these transactions, see Note 8 in the Notes to Consolidated Financial
Statements.

20

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are to fund capital expenditures, such as
expanding and upgrading manufacturing facilities and capacity, to fund new
product development and to provide additional working capital. Our primary
sources of funds have been from our initial public offering completed in October
2000 from which we received net proceeds of $39.6 million, cash flow from
operations, reimbursement of costs related to the joint industry project to
develop a subsea mudlift drilling system in which we participated and proceeds
from borrowings under our bank facilities.

OPERATING ACTIVITIES

Cash provided by operating activities was $45.1 million for 2001 and $27.9
million for 2000. The increase in cash provided by operations in 2001 compared
to 2000 was primarily the result of improved operating results in both of our
segments driven by higher revenues and contractual cash payments from customers
on project orders in backlog which will be expended to complete the projects
over the next eighteen months. Cash provided by operations in 2000 was $17.2
million higher than 1999 as a result of improved operating results partially
offset by increased working capital requirements.

INVESTING ACTIVITIES

Net cash used in investing activities for 2001 was $29.5 million compared
to $7.9 million for 2000. The increase in net cash used for 2001 compared to
2000 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.

Cash provided by investing activities for 1999 was $6.3 million, which
included $13.1 million in proceeds from the sale of marketable securities, $2.0
million from the sale of real estate holdings not used in operations, and
partially offset by capital spending of $8.8 million. For more information on
capital expenditures for the three years ended December 31, 2001, see "Capital
Expenditures" below.

CREDIT FACILITIES

We have a domestic revolving line of credit for working capital
requirements that provides up to $25.0 million in committed revolving credit
borrowings through March 31, 2003. Effective September 25, 2001, this facility
became unsecured. We may borrow, at our election, at either a prime or LIBOR
based interest rate. Interest rates under the facility fluctuate depending on
our leverage ratio and are LIBOR plus a spread ranging from 125 to 200 basis
points or prime. At December 31, 2001, there were no outstanding borrowings
under this facility. Our revolving credit agreement contains covenants with
respect to debt levels, tangible net worth, debt-to-capitalization and interest
coverage ratios. At December 31, 2001, we were in compliance with these
covenants.

Additionally, Hydril has a committed foreign line of credit for $10.0
million and an uncommitted foreign line of credit for $4.0 million. The
committed line is an unsecured facility established in September 2001. We may,
at our election, borrow under it at either a prime or LIBOR based interest rate.
Interest rates under the committed 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, 2001, there were no outstanding borrowings under this facility.

The uncommitted line can be terminated at the bank's discretion and the
interest rate is a fixed rate based on current Eurodollar market conditions at
the time of the draw, which at December 31, 2001 would have been 4.5%. There
were no borrowings under this line as of December 31, 2001.

21

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. Effective
September 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, which as of December 31, 2001 would
require a premium payment of $3.2 million. 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,
2001, 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 (JIP) to develop dual gradient drilling
technology completed its final phase in the fourth quarter of 2001 by
successfully drilling a test well in the Gulf of Mexico. The JIP consisted of
Conoco (administrator), Hydril (project designer and technology leader) BP,
ChevronTexaco, Diamond Offshore, GlobalSantaFe and Schlumberger. We contributed
approximately $2.0 million of the $49.0 million in total project expenditures.
The JIP has completed its work and Hydril is pursuing commercialization through
its wholly-owned subsidiary, SubSea MudLift Drilling Company, LLC. Expenditures
to commercialize this technology will be expensed and are expected to be less
than 5% of total selling, general and administrative expenses in 2002.

CAPITAL EXPENDITURES

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.

Capital expenditures for 1999 were $8.8 million, which were primarily for
the relocation and expansion of our Houston premium connection facility.

If current industry conditions continue, we expect our 2002 capital
expenditures to be up to $20.0 million. Planned capital expenditures include the
expansion of our capacity to produce premium connections, the upgrade of our
machine tools we use to manufacture pressure control products, and product
development.

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 at December 31, 2001 and 2000
was $55.8 million and $15.2 million, respectively. The increase in our backlog
primarily reflects a $37 million order received during the first quarter of 2001
and two additional orders received during the second and fourth quarters of 2001
for blowout prevention and control system equipment. We include in this backlog
orders for pressure control capital equipment and long-term projects. It is
possible for orders to be cancelled; however, in the event of cancellations all
costs incurred would be billable to the customer. We recognize the revenue and
gross profit from pressure control long-term projects using the
percentage-of-completion accounting method and the remaining revenues

22

from projects currently in backlog are expected to be recorded during 2002 and
2003. As revenues are recognized under the percentage-of-completion method, the
order value in backlog is reduced. 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, 2001, we had deferred tax assets, net of deferred tax
liabilities, of $9.2 million, which includes net operating loss carryforwards,
or NOLs, and foreign tax credits. These assets are benefits to us as long as we
expect to have sufficient future income in the United States. NOLs total
approximately $0.6 million and must be used entirely before the foreign tax
credits, which total approximately $7.7 million, can be used. The NOLs are
available to offset future taxable income through the year 2019 and the foreign
tax credits are available through the year 2005 to reduce future United States
income taxes payable. We could lose the benefit of our NOLs if we were to have a
change of control. Section 382 of the Internal Revenue Code of 1986, as amended,
limits the ability of a corporation that undergoes an "ownership change" to use
its net operating losses to reduce its tax liability. Although we believe our
initial public offering in October 2000 and the secondary offering completed in
May 2001 did not trigger such an ownership change, it is possible that a future
offering of our common stock or future transfers of our common stock may trigger
an ownership change. In that event, we would not be able to use our
pre-ownership-change net operating losses in excess of the limitation imposed by
Section 382.

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 revenues and expenses 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

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

Revenues from long-term contracts, which are 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.

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 81% and 80% of total gross inventories at December 31, 2001 and
2000, respectively) and by the first in, first out method for all other
inventories.

23

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.

CONTINGENCIES

Contingencies are accounted for in accordance with the Financial Accounting
Standards Board's SFAS No. 5, "Accounting for Contingencies" ("SFAS"). 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 loss
contingency is significantly different than the estimated loss, our results of
operations may be over or understated.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires an entity to recognize
all derivatives as an asset or liability measured at its fair value. Depending
on the intended use of the derivative, changes in its fair value will be
reported in the period of change as either a component of earnings or a
component of other comprehensive income. SFAS 133 is effective for all fiscal
years beginning after June 15, 2000. Hydril adopted SFAS 133 effective January
1, 2001. The adoption of this policy did not require any transition adjustment
and thus, did not materially affect our results of operations or financial
condition.

In July 2001, the 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 has evaluated the provisions of SFAS 141 and
SFAS 142 and expects no material impact on its financial statements from the
adoption of these standards.

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. 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 has evaluated the provisions of SFAS 143 and SFAS 144 and
expects no material impact on its financial statements from the adoption of
these standards.

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

INTEREST RATE RISK

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

24

At December 31, 2001, we had $60 million of fixed rate senior notes, having
a fair value of $60.8 million. Interest payable on these notes is at a
fixed-rate and therefore, the notes do not expose us to the risk of earnings
loss due to changes in interest rates. However, the fair value of the notes
would increase by approximately $0.5 million if interest rates were to decline
10% from their level at December 31, 2001. In general, such an increase in fair
value would impact earnings and cash flows only if we were to prepay all or a
portion of the notes prior to maturity.

There were no outstanding borrowings under our lines of credit at December
31, 2001. 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, 2001 or 2000, we did not hedge interest rate exposure.

FOREIGN CURRENCY EXCHANGE RATE

Our operations are conducted in certain countries around the world in a
number of different currencies. As such, future earnings are subject to change
due to changes in foreign currency exchange rates when transactions are
denominated in currencies other than our functional currency, the U.S. dollar.
In order to mitigate the effect of exchange rate changes, a substantial portion
of our contracts provide for collections from customers in U.S. dollars. For
2001, approximately 64% 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, 2001 or 2000.

25

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HYDRIL COMPANY

INDEX TO FINANCIAL STATEMENTS

26

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, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2001.
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,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Houston, Texas
March 1, 2002

27

HYDRIL COMPANY

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

See notes to consolidated financial statements

28

HYDRIL COMPANY

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

See notes to consolidated financial statements

29

HYDRIL COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See notes to consolidated financial statements

30

HYDRIL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See notes to consolidated financial statements

31

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 13
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 revenues and expenses during the reporting period. Actual results could
differ from those estimates.

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

Revenues from long-term contracts, which are 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. Revenues from long-term contracts were
approximately 8%, 8% and 12% of total revenues for the years ended December 31,
2001, 2000 and 1999, respectively.

Cash and Cash Equivalents -- Cash equivalents are highly liquid investments
including commercial paper and time deposits having original maturities of three
months or less.

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, 2001, 2000 and 1999 is as follows:

Other adjustments consist primarily of the collection of a customer's
account previously determined as doubtful for collection, and general reserve
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 81% and 80% of total gross inventories
at December 31, 2001 and 2000, respectively) and by the first in, first out
("FIFO") method for all other inventories. If the FIFO method

32

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

had been used to value all inventories, the cost would have been $12,083,000,
$11,895,000 and $12,136,000 higher at December 31, 2001, 2000 and 1999,
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, 2001,
2000 and 1999 is as follows:

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

Buildings and improvements............................ 20-45 years
Machinery and equipment............................... 3-12 years

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

Included in other assets within the consolidated balance sheets at December
31, 2001 and 2000 are $2,671,000 and $2,701,000 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.

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 industry
participants or government organizations 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 $2,115,000,
$1,430,000 and $1,107,000, for the years ended December 31, 2001, 2000 and 1999,
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.

33

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 13 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.

2. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES

Accrued liabilities and other long-term liabilities as of December 31, 2001
and 2000 consisted of the following:

34

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM CONTRACTS

The components of long-term contracts as of December 31, 2001 and 2000
consist of the following:

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 incurred on these projects, including late delivery penalties, were
approximately $1,500,000 and $3,700,000 for the years ended December 31, 2000
and 1999, respectively. There were no such losses recorded in 2001. Provisions
for estimated losses were determined by comparing total sales price to costs
incurred plus estimated costs to complete the contract. Provision for estimated
losses have been made, to the extent applicable, for all projects not completed
as of December 31, 2001. As of December 31, 2001 and 2000, the Company had
accrued a reserve for project losses of $120,000 and $3,263,000, respectively.

The Company incurred late delivery penalties when projects were not
delivered timely because of evolving engineering design, individual project
customization and limited manufacturing capacity. As of December 31, 2000, the
Company had accrued as part of the reserve for project losses $1,756,000 for
late delivery penalties. As of December 31, 2001, all such penalties had been
settled and therefore, no portion of the accrual for project losses as of that
date related to late delivery penalties.

As of December 31, 2000, the Company had $1,525,000 of receivables
representing amounts billed to, but unpaid, by customers pending completion of
the projects. Receivables as of December 31, 2001 did not include any such
billed but unpaid amounts.

35

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. LONG-TERM DEBT

The Company's borrowings as of December 31, 2001 and 2000 were as follows:

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, which as of December 31, 2001 would require a premium payment of
$3,186,000.

Revolving lines of credit -- As of December 31, 2001, the Company has
available an unsecured U.S. revolving line of credit of $25,000,000. The credit
line will mature March 31, 2003. 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, 2001, there were
no outstanding borrowings under this credit facility.

Additionally, the Company has two foreign revolving lines of credit for use
in its international operations. The first of these is an unsecured facility
established in September 2001, totaling $10,000,000. This committed credit line
matures March 31, 2003. 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, 2001, there were no outstanding borrowings
under this facility.

The second foreign revolving line of credit is an unsecured facility of
$4,000,000, of which none was outstanding at December 31, 2001. This uncommitted
facility can be terminated at the bank's discretion. The interest rate on this
line is a fixed rate based on current Eurodollar market conditions at the time
of the draw, which at December 31, 2001 would have been 4.5%. At December 31,
2001, there were no outstanding borrowings under this facility.

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 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, 2001, the Company was in compliance these
covenants.

36

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Collateral -- On September 25, 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. Prior to this amendment, the senior notes and the U.S. revolving line
of credit were secured, on a pari passu basis, by accounts receivable,
inventory, equipment, intellectual property, certain real property, 100% of the
stock of domestic subsidiaries, and 65% of the stock of foreign subsidiaries.

IBM note financing -- The Company is financing certain equipment and
completed consulting agreements with IBM over a five-year period beginning June
1997. The notes bear interest at 4.90% -- 7.61% per annum.

Debt maturities -- The estimated remaining principal payments on the
outstanding debt, exclusive of capital lease obligations, as of December 31,
2001 are as follows: (in thousands)

5. INCOME TAXES

The geographical sources of income (loss) before income taxes for the years
ended December 31, 2001, 2000 and 1999 were as follows:

The provision (benefit) for income taxes for the years ended December 31,
2001, 2000 and 1999 consisted of the following:

37

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The consolidated effective income tax rates (as a percentage of income
before income taxes) for the years ended December 31, 2001, 2000 and 1999 varies
from the United States statutory income tax rate for the reasons set forth
below:

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, 2001 and 2000 were as
follows:

At December 31, 2001, the Company had approximately $600,000 of net
operating losses available to offset future taxable income through the year
2019. In addition, the Company has approximately $700,000 of federal alternative
minimum tax credits which are available to reduce future federal income tax
payable, if any, over an indefinite period (although not below the tentative
minimum tax otherwise due in any year), and approximately $7,700,000 of foreign
tax credits which are available to reduce future U.S. income taxes payable, if
any, through the year 2005.

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 benefit will be accrued under this plan.
Beginning January 1, 2002, the Company has a new retirement contribution plan to
replace its 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. Effective December 31, 1999,
the Company changed eligibility provisions for this plan, significantly reducing
the number

38

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of participants. Under the provisions of SFAS No. 106, "Employers' Accounting
for Post retirement Benefits Other Than Pensions," this change to the plan
resulted in the recognition of $2,225,000 of net curtailment gains in 1999. Also
effective December 31, 1999, the Company changed the plan to increase premiums
and reduce lifetime cap provisions. These negative plan amendments resulted in
an additional $4,579,000 of negative prior service cost that will be amortized
as a reduction of expense over the remaining life expectancy of fully eligible
participants.

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

39

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The assumed discount rate and salary increase rate used in determining the
benefit obligation were 6.75% and 4.50%, respectively, at December 31, 2001.
Such rates used at December 31, 2000 and 1999 were 7.50% and 4.50% and 7.75% and
4.50%, respectively. The expected long-term rate of return on pension plan
assets at December 31, 2001, 2000 and 1999 was 9%, 9% and 8%, 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 2007 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 2009 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:

Defined Contribution Plans -- The Company has an employee savings plan
under which U.S. employees can invest up to 12% of their earnings matched by an
amount from the Company equal to one-half of the first 6% of the employees'
contributions. The Company's contributions were $859,000, $793,000 and $898,000
in 2001, 2000 and 1999, respectively.

Effective January 1, 2002, the Company has a new defined contribution
retirement plan, in which the Company will make 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.

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

40

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, 2001 and 2000, 14,359,596 and 8,641,200 shares of
common stock were issued and outstanding, and 7,966,404 and 13,410,908 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, 2001 and 2000, 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.

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

41

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2001, 5,835
shares had been issued under this plan. In January 2002, an additional 6,413
shares were issued for the offering period June 2001 through December 2001.

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

8. OTHER INCOME AND EXPENSE

Gain on Marketable Securities -- In January 1998, the Company purchased two
put option contracts from a major financial institution for a total of
$2,745,000 to sell 408,007 registered shares of Weatherford International, Inc.
("WFI") common stock for $44.53 per share (the "put price"). The shares
represented the Company's remaining interest in WFI, which was less than 1% of
WFI's outstanding common stock. The WFI shares were received as consideration in
exchange for shares received in a legal settlement in 1994. The put options were
purchased to provide protection against a decline in the market value of the WFI
shares.

Put options covering 200,000 WFI shares were exercised by the Company
immediately prior to their expiration in July 1998 as a result of which the
Company received a cash settlement of approximately $981,000, representing the
amount by which the put price for those shares exceeded the market price at that
time. Put options covering the remaining 208,007 WFI shares were exercised by
the Company immediately prior to their expiration in January 1999, at which time
the Company received a cash settlement of approximately $5,102,000 again
representing the amount by which the put price for those shares exceeded the
market price at the time of exercise. Following both exercises, the Company
retained the 408,007 shares of WFI common stock covered by the put options.
Subsequently, in the first quarter of 1999, the Company sold the 408,007 shares
of WFI common stock in ordinary brokerage transactions on the New York Stock
Exchange and recognized a gain of $253,000 from the sale.

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

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).

42

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. EARNINGS PER SHARE

The Company has presented basic and diluted income (loss) per share ("EPS")
on the consolidated statement of operations. Basic EPS excludes dilution and is
computed by dividing income (loss) 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.

For 1999, the only potentially dilutive securities are 702,000 options
outstanding under the Company's 1999 Stock Option Plan. However, for the 12
months ended December 31, 1999, these securities were anti-dilutive and
therefore were not included in the EPS calculations. The following table
summarizes the computation of basic and diluted net income (loss) per share:

10. COMMITMENTS AND CONTINGENCIES

Leases -- The Company's lease commitments are principally for operating
facilities and equipment. Leases for certain data processing equipment are
capitalized because these leases transfer ownership of the equipment to the
Company at the end of the lease term.

43

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Property and equipment at December 31, 2001 included equipment under
capital leases with a net book value of $373,000. Rental expense was $1,284,000,
$1,306,000 and $952,000, for the years ended December 31, 2001, 2000 and 1999,
respectively.

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

The Company has been 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 is approximately $303,000, which is expected to be
disbursed in 2002. This obligation has been adequately reserved for in the
financial statements and will 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.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments at December 31, 2001 and 2000 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 long-term debt at
December 31, 2001 was $61,007,000 and $60,234,000, respectively. The estimated
fair value and carrying amount of long-term debt at December 31, 2000 was
$61,428,000 and $60,767,000, respectively.

12. 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

44

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2001, 518,000 options were granted to officers and key employees for the
purchase of common stock. 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 non-employee 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 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, in
connection with the Company's initial public offering, pursuant to the 2000
plan, 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, 2001. 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.

A summary of the status of the Company's stock option activity, and related
information for the years ended December 31, 2001 and 2000, is presented below:

45

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about stock options outstanding
as of December 31, 2001:

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. 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 $1,018,000 and $433,000 in 2001 and 2000, and the
net loss would have been increased by $599,000 in 1999, respectively.

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

13. 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

46

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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, 2001, 2000 and 1999 is as follows:

47

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For the years ended December 31, 2001 and 2000, no customer exceeded 10% of
the Company's consolidated revenues. For the year ended December 31, 1999,
revenues from one customer of the Company's pressure control segment represented
13% of the Company's consolidated revenues.

14. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)

48

HYDRIL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

(2) Includes a pre-tax gain of $3,576,000 for the settlement of a dispute with a
financial institution from which the Company purchased put options in 1998.

(3) Includes a pre-tax gain of $1,870,000 from the sale of real estate not used
in operations.

15. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
requires an entity to recognize all derivatives as an asset or liability
measured at its fair value. Depending on the intended use of the derivative,
changes in its fair value will be reported in the period of change as either a
component of earnings or a component of other comprehensive income. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company adopted SFAS 133 effective January 1, 2001. The adoption of this
policy did not require any transition adjustment and thus, did not materially
affect the Company's results of operations or financial condition.

In July 2001, the 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 has evaluated the provisions of SFAS 141 and
SFAS 142 and expects no impact on its financial statements from the adoption of
these standards.

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. 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 has evaluated the provisions of SFAS 143 and SFAS 144 and
expects no impact on its financial statements from the adoption of these
standards.

49

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 21, 2002.

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 caption
"Security Ownership of Certain Beneficial Owners and Management" 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.

PART IV

ITEM 14 -- 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.

50

3. Exhibits

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

* Incorporated by reference as indicated.

+ Denotes management compensatory plan or agreement.

Reports on Form 8-K:

During the quarter ended December 31, 2001, no reports were filed on
Form 8-K.

52

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 26th day of March 2002.

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)

Date: March 26, 2002

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 26th day of March 2002.

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INDEX TO EXHIBITS

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* Incorporated by reference as indicated.

+ Denotes management compensatory plan or agreement.