GRANT PRIDECO INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

COMMISSION FILE NUMBER 001-15423

GRANT PRIDECO, INC.
(SEE TABLE OF ADDITIONAL REGISTRANTS ON NEXT PAGE)
(Exact name of Registrant as specified in its Charter)

DELAWARE 76-0312499
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1330 POST OAK BLVD.
SUITE 2700
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)

(832) 681-8000
(Registrant's telephone number, include area code)

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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

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TABLE OF ADDITIONAL REGISTRANTS

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** Except for Grant Prideco USA, LLC, the address, telephone number and zip
code for each of the additional Registrants is the same as for Grant
Prideco, Inc. The address, telephone number and zip code for Grant Prideco
USA, LLC is 500 Delaware Avenue, Suite 900, Wilmington, DE 19801.

Grant Prideco, Inc. (the "Company") owns directly or indirectly all of the
outstanding capital stock of each of the additional Registrants listed above.
Each of the additional Registrants is a guarantor of the Company's obligations
under its 9 5/8% Senior Notes Due 2007 (the "Senior Notes"). No separate
financial statements for the additional Registrants have been provided or
incorporated because: (1) the financial statements of the Company included in
this report include the operations of each of the additional Registrants and (2)
Note 14 to the Company's accompanying unaudited financial statements includes
unaudited condensed consolidating financial statements of the Company separating
the financial results for the additional Registrants from the Company and any
subsidiaries that are not guarantors of the Company's obligations under the
Senior Notes.

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GRANT PRIDECO, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNT)

The accompanying notes are an integral part of these financial statements.

3

GRANT PRIDECO, INC.

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

The accompanying notes are an integral part of these financial statements.

4

GRANT PRIDECO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

The accompanying notes are an integral part of these financial statements.

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GRANT PRIDECO, INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL

Basis of Presentation

The accompanying consolidated financial statements of Grant Prideco, Inc.
(the Company or Grant Prideco) have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all disclosures required by generally
accepted accounting principles for complete financial statements. All
significant transactions among Grant Prideco and its consolidated subsidiaries
have been eliminated. The interim financial statements have not been audited.
However, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
statements have been included. Results of operations for interim periods are not
necessarily indicative of the results of operations that may be expected for the
entire year. These interim financial statements should be read in conjunction
with the audited financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2001.

The Annual Report on Form 10-K for the year ended 2001 includes disclosures
related to significant accounting policies including revenue recognition,
account receivable valuation, inventory valuation, business combinations,
impairment of long-lived assets and estimates related to contingent liabilities
and future claims. There have been no significant changes to any of our critical
accounting policies.

Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding 2002 classifications and are of a normal recurring
nature. These reclassifications have no impact on net income (loss).

2. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes changes in stockholders' equity during
the periods that do not result from transactions with stockholders. The
Company's total comprehensive income (loss) is as follows:

3. INVENTORIES

Inventories by category are as follows:

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4. OTHER CHARGES

2000 Charges

The Company incurred $41.3 million of pre-tax charges, $26.9 million net of
tax, in the fourth quarter of 2000 relating primarily to inventory write-offs
and other asset impairments and reductions. Of this amount, $7.9 million related
to accrued liabilities. The accrued liability balances as of June 30, 2002 are
summarized below:

The remaining accrued liabilities are expected to be paid in 2002, except
for the open litigation issue, which is under appeal.

First Quarter 2001 Charges

In the first quarter of 2001, the Company incurred approximately $43.0
million of pre-tax charges, $28.0 million net of tax, associated with its review
of the continued viability of its manufacturing arrangement with Oil Country
Tubular Ltd. (OCTL) in India, a modification of the Company's manufacturing
standards and costing in light of current market conditions, and an ongoing
restructuring of the Company's operations. This charge also included executive
severance payments and related expenses of approximately $14.6 million, all of
which were paid in 2001. These charges are summarized in the following chart:

- ----------

(a) In connection with the Company's operational review conducted in
2001, the Company reassessed the viability of restructuring its
relationship with OCTL in India and determined that a continued
relationship was no longer viable. As a result of this determination,
the Company wrote-off the remaining $17.7 million ($11.5 million
after-tax) of unpaid receivables and advances owed to it by OCTL.

(b) The inventory write-off was reported as cost of sales and was made
pursuant to a review of the Company's planned dispositions of
inventory in an effort to reduce inventory levels of older,
slow-moving products. The amount was determined by use of internal
appraisals and evaluations to assess the estimated net realizable
value upon disposal and also included a charge related to certain
inventory purchase contract obligations with above market prices.

(c) Certain capitalized manufacturing cost variances were expensed as
cost of sales in connection with the Company's operational review and
revisions of manufacturing standards and costing during 2001.

(d) The severance charge relates to executive, manufacturing, and
marketing employees terminated in connection with the Company's
restructuring plan that was implemented in 2001. The total number of
employees severed was 24, and the amount accrued for severance was
based upon the positions eliminated and the Company's severance
policy.

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Second Quarter 2002 Charges

Results for the second quarter of 2002 include $7.0 million of pre-tax
charges, $4.9 million net of tax. These charges include $2.6 million related to
fixed asset write-downs and $4.5 million for executive severance payments and
related expenses. These charges are summarized in the following chart (in
thousands):

- ----------

(a) The fixed asset write-downs relate to idle assets taken out of
service pursuant to the Company's ongoing automation and efficiency
initiatives and are classified as held for sale. The amount was
determined by use of internal appraisals and evaluations to assess
the estimated fair value upon disposition. The equipment, which has a
carrying value of $0.2 million, is expected to be disposed of in the
next 12 months.

(b) The severance charge relates to an executive employee terminated
during June 2002. The amount accrued for severance was based upon the
terminated employee's employment contract, which was paid in July
2002.

5. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income or loss
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution from the exercise or
conversion of securities into common stock. Common stock equivalent shares are
excluded from the computation if their effect is antidilutive. The effect of
stock options is not included in the diluted computation for periods in which a
loss occurs because to do so would have been antidilutive. For the six month
period ended June 30, 2001, stock options to purchase 1.4 million shares were
excluded from the computation of diluted earnings per share due to their
antidilutive effect. The computation of diluted earnings per share for the three
and six months ended June 30, 2002 did not include options to purchase 4.5
million and 4.9 million shares, respectively, of common stock because their
exercise prices were greater than the average market price of the common stock
for the applicable period.

6. CREDIT FACILITY

In April 2000, the Company entered into a revolving credit facility with a
syndicate of U.S. banks (the "Credit Facility"), through April 14, 2003, with
automatic one-year renewals thereafter, unless either party terminates the
agreement. Originally, the committed amount was $100 million. In February 2002,
the Company increased this committed amount to $135 million. The Credit Facility
is secured by the Company's U.S. and Canadian inventories, equipment and
receivables and is guaranteed by Grant Prideco's domestic subsidiaries. The
Company is required to comply with various affirmative and negative covenants
which limit its ability to incur new debt, make certain investments and
acquisitions, sell assets, grant liens, and other related items. The Company is
also subject to financial covenants which require it to maintain a certain
tangible net worth and fixed charge coverage ratio. As of June 30, 2002, the
Company is in compliance with the various covenants under the Credit Facility
agreement. As of June 30, 2002, the Company had outstanding borrowings of $11.7
million under the Credit Facility and $3.9 million had been used to support
outstanding letters of credit. The average interest rate for the outstanding
borrowings under the Credit Facility was 5.25% at June 30, 2002.

Additionally, at June 30, 2002, there were outstanding borrowings of $0.3
million under a miscellaneous credit facility and $1.3 million of outstanding
letters of credit had been supported under various available letter of credit
facilities that are not related to the Credit Facility.

7. FINANCIAL INSTRUMENTS

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended. SFAS No. 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. The adoption of SFAS No. 133
on January 1, 2001 did not have a material impact on results of operations but
resulted in the cumulative effect of an accounting change of $0.3 million
pre-tax being recognized as a loss in "Accumulated Other Comprehensive Loss" in
the accompanying Consolidated Balance Sheets.

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The Company uses foreign currency forwards and call options to hedge certain
of its exposures to changes in foreign exchange rates, primarily related to the
Euro. The forwards and call options have only nominal value at the time of
purchase. The counterparties to these derivative foreign exchange contracts are
creditworthy multinational commercial banks. Management believes that the risk
of counterparty nonperformance is minimal. The Company does not engage in
derivative activity for speculative or trading purposes. The Company does not
have any off-balance sheet hedging or financing arrangements or contracts, other
than operating leases which primarily relate to office space and equipment.

CASH FLOW HEDGES

At June 30, 2002, the Company had U.S. Dollar/Euro forward contracts and
call options with notional amounts totaling $2.5 million. These contracts are
designated as cash flow hedges of anticipated Euro-denominated expenditures
through August 2002.

The contracts are marked to market based on the forward rate (net fair value
was ($0.2) million at June 30, 2002) and recorded as "Other Accrued Liabilities"
in the accompanying Consolidated Balance Sheets, with the offset recorded as
other comprehensive income (loss), net of applicable hedge ineffectiveness
(which is measured based on the forward price and was not material) and income
taxes, and then subsequently recognized as a component of cost of sales or
selling, general, and administrative expenses when the underlying hedged
transaction is recognized in the Consolidated Statement of Operations. During
the first quarter of 2001, the Company recognized losses of $0.6 million in
"Other, Net" in the accompanying Consolidated Statements of Operations related
to foreign currency forward contracts that resulted from an overhedge position
with respect to the anticipated Euro-denominated purchases of inventory.

The following table summarizes activity in other comprehensive income (loss)
related to derivatives classified as cash flow hedges held by the Company (in
thousands):

FAIR VALUE HEDGES

The Company had two forward contracts in place to purchase a total of 2.9
million Euros for a notional amount of $2.9 million at December 31, 2001. In
January 2002, one of the forward contracts expired, and the remaining forward
contract related to the 3 1/2 year Voest-Alpine debt was cancelled. There was no
material impact on income as a result of these transactions.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets". Under SFAS No. 142, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but will be subject to
annual impairment tests. Goodwill amortization was $6.4 million in 2001. Other
intangible assets will continue to be amortized over their useful lives.

In accordance with SFAS No. 142, prior period amounts were not restated. A
reconciliation of the previously reported net income and earnings per share for
the three and six months ended June 30, 2001 to the amounts adjusted for the
reduction of amortization expense, net of the related income tax effect, is as
follows (in thousands, except per share amounts):

Intangible assets of $5.8 million, including accumulated amortization of
$2.7 million, as of June 30, 2002 are recorded at cost and are amortized on a
straight-line basis. The Company's intangible assets primarily consist of
covenants-not-to-compete, technology

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licenses and patents that are amortized over the definitive terms of the related
agreement or the Company's estimate of the useful life if there are no
definitive terms. Amortization expense for the three and six months ended June
30, 2002 was $0.3 million and $0.5 million, respectively, and for the three and
six months ended June 30, 2001 was $0.3 million and $0.5 million, respectively.
Amortization expense for the full year 2002 is estimated to be approximately
$0.8 million. Excluding the impact of future acquisitions, estimated annual
amortization expense related to existing intangible assets for years 2003
through 2006 is expected to be approximately $0.6 million, $0.5 million, $0.3
million and $0.2 million, respectively.

SFAS 142 provides for a two-step transitional goodwill impairment test with
respect to existing goodwill. The first step of the test involved a comparison
of the fair value of each of the Company's reporting units, as defined under
SFAS No. 142, with its carrying value. If the carrying amount exceeded the fair
value of a reporting unit, the Company is required to complete the second step
of the transitional goodwill impairment test for this reporting unit by December
31, 2002. The Company's reporting units are as follows: 1) Drilling Products and
Services, 2) Premium Connections and Tubular Products (excluding Texas Arai and
Tube-Alloy(TM)), 3) Texas Arai, 4) Tube-Alloy(TM) 5) Marine Products and
Services and 6) Industrial.

Completion of the first step of the test indicated the carrying value of the
Industrial reporting unit exceeded its fair value and the Company will be
required to perform the second step of the impairment test for this reporting
unit by December 31, 2002. The total amount of goodwill related to the
Industrial reporting unit is approximately $11 million. The fair value of the
Industrial reporting unit was determined using a combination of discounted cash
flow projections and comparable company market value multiples. The
circumstances leading to the goodwill impairment in the Industrial reporting
unit are overall weak market conditions in the telecommunications industry which
have contributed to declining revenues and profitability and a reduction in the
estimated future expected performance of this reporting unit, which manufactures
drill pipe and other products used in the industrial markets for fiber optic
cable installation and water well drilling.

The second step of the test will be based on a comparison of the implied
fair value of the Industrial reporting unit's goodwill to its carrying value to
measure the amount of impairment. Once the impairment charge is determined, it
will be treated as a non-cash charge and will be recorded as a cumulative effect
of a change in accounting principle in the Consolidated Statements of
Operations. SFAS 142 requires goodwill to be tested annually and also on an
interim basis if events occur or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
The Company has elected to perform its annual tests for potential goodwill
impairment as of October 1st of each year. Subsequent impairment losses, if any,
will be reflected in income from continuing operations. The carrying amount of
goodwill by reporting unit is as follows:

9. RESTRICTED CASH

At June 30 2002, the Company had $6.4 million of restricted cash related to
its 54% interest in H-Tech that is subject to dividend and distribution
restrictions.

10. SEGMENT INFORMATION

BUSINESS SEGMENTS

The Company operates primarily through three business segments: drilling
products and services, premium connections and tubular products, and marine
products and services. The Company's drilling products and services segment
manufactures and sells a full range of proprietary and API drill pipe, drill
collars, heavy weight drill pipe and accessories. The Company's premium
connections and tubular products segment designs, manufactures and sells a
complete line of premium connections and associated premium tubular products and
accessories. The Company's marine products and services segment manufactures and
sells a variety of products used in subsea construction and installations. In
addition to the products and services provided through the three primary
segments, the Company also manufactures drill pipe and other products used in
the industrial markets for fiber optic cable installation, construction

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and water well drilling. The Company is also involved in joint ventures for the
development of telemetry drill pipe and composite motors and pumps, which are
classified in "other".

Premium Connections and Tubular Products

The following table sets forth additional information for the Company's
Premium Connections and Tubular Products segment. The Company has provided this
information for its four principal product lines in this segment: (1) Atlas
Bradford(R) line and other lines of premium threading and tubing, (2) TCA(TM)
critical-service casing and processing, (3) Tube-Alloy(TM) premium accessories
and (4) Texas Arai couplings.

11. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations". SFAS No. 141 eliminates pooling-of-interest
accounting and requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method. The adoption of SFAS No. 141 had
no impact on the Company's consolidated results of operations and financial
position.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". This

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statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", and the accounting and
reporting provisions of Accounting Principles Board Opinion (APB) No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement retains the fundamental provisions of
SFAS No. 121 and the basic requirements of APB No. 30; however, it establishes a
single accounting model to be used for long-lived assets to be disposed of by
sale and it expands the presentation of discontinued operations to include more
disposal transactions. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001.
Effective January 1, 2002, the Company adopted SFAS No. 144. The adoption of
SFAS No. 144 had no material impact on the Company's consolidated results of
operations and financial position.

In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued.
SFAS No. 145 rescinds SFAS No. 4 and SFAS No. 64 related to classification of
gains and losses on debt extinguishment such that most debt extinguishment gains
and losses will no longer be classified as extraordinary. SFAS No. 145 also
amends SFAS No. 13 with respect to sale-leaseback transactions. The Company
adopted the provisions of SFAS No. 145 effective April 1, 2002, and the adoption
had no impact on the Company's consolidated results of operations and financial
position.

On July 29, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit plan or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 replaces EITF Issue No. 94-3 and is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company will adopt SFAS No. 146 as of January 1, 2003. At this time, the
Company does not believe that the adoption of SFAS No. 146 will have a material
impact on its consolidated results of operations and financial position.

12. ACQUISITIONS

On March 26, 2002, the Company acquired an additional 48.5% interest in
Jiangsu Shuguang Grant Prideco Tubular Limited (JSG), a Chinese entity engaged
in the manufacture and sale of drill pipe to the Chinese and related markets,
thereby giving the Company a 70% controlling interest in JSG. The Company
previously owned approximately 21.5% of JSG and accounted for its investment
under the equity method. The Company paid approximately $0.5 million in cash and
issued 1.3 million shares of Grant Prideco common stock for the additional
interest. Goodwill recognized in the step acquisition of JSG was approximately
$11.3 million. Subsequent to acquiring a controlling interest, the Company's
consolidated financial statements include the accounts of JSG. Previously
recorded goodwill of $2.9 million related to the Company's initial 21.5%
investment has been reclassified from "Investments in Unconsolidated Affiliates"
to "Goodwill" in the Consolidated Balance Sheet as of June 30, 2002.

The Company also has entered into a joint venture with Tianjin Pipe Company
(TPCO) for the manufacture of unfinished upset to grade pipe in China, with the
intent of this joint venture to supply JSG with all of its tubular requirements.
The Company currently owns a 60% interest in the joint venture with TPCO and
plans to invest approximately $5 million in 2002 for machinery and equipment
representing the Company's contribution to the joint venture. As of June 30,
2002, the Company had invested approximately $2.5 million into this joint
venture.

On May 7, 2002, the Company acquired 65% of Rotator AS (Rotator), a
Norwegian company that manufactures control valves and systems for the offshore
oil and gas industry. The Company has the right to acquire the remaining 35% of
Rotator two years following its purchase, with the price being based on
Rotator's results of operations during this two-year period. The Company issued
approximately 0.3 million shares of Grant Prideco common stock with a value of
approximately $5.1 million for the initial 65% interest. Goodwill recognized in
the acquisition of Rotator was approximately $2.7 million. The terms of the
agreement also provided a guarantee by the Company to the selling shareholders
that they would receive 41,500,000 Norwegian Kroner (NOK) upon their disposition
of the Grant Prideco common stock. Any price deficiency would be paid in cash by
the Company to the selling shareholders, and any price excess would be applied
towards the purchase price to be paid by the Company for the additional 35%
interest. In July 2002, the selling shareholders sold the Grant Prideco common
stock at a price deficiency upon disposition and the Company was required to
make a cash payment of $0.9 million.

The acquisitions discussed above were accounted for using the purchase
method of accounting, and the purchase prices were allocated to the net assets
acquired based upon their estimated fair market values at the date of
acquisition. The purchase price

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allocations are based upon the best estimates using information currently
available and is subject to changes when final asset and liability valuations
are obtained. The results of operations of all acquisitions are included in the
Consolidated Statements of Operations from their respective dates of
acquisition. The 2002 acquisitions were not material to the Company individually
or in the aggregate. Therefore, pro forma information is not presented. See Note
13 for supplemental cash flow information concerning acquisitions.

13. SUPPLEMENTAL CASH FLOW INFORMATION

The following table summarizes investing activities relating to
acquisitions (in thousands):

SIX MONTHS
ENDED
JUNE 30, 2002
-------------

Fair value of assets, net of cash acquired................ $ 23,734
Goodwill.................................................. 14,015
Total liabilities ........................................ (18,276)
Grant Prideco common stock issued......................... (21,817)
----------
Net cash received..................................... $ (2,344)
==========

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14. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION

The following unaudited condensed consolidating balance sheet as of June
30, 2002, condensed consolidating statements of operations for the three and six
months ended June 30, 2001 and 2002 and condensed consolidating statements of
cash flows for the six months ended June 30, 2001 and 2002 are provided for the
Company's domestic subsidiaries that are guarantors of the Company's $200
million principal amount of the 9 5/8% Senior Notes due 2007.

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2002
(UNAUDITED)
(IN THOUSANDS)

NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------

ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ -- $ 1,827 $ 17,067 $ -- $ 18,894
Restricted Cash -- -- 6,447 -- 6,447
Accounts Receivable, Net -- 104,961 43,641 -- 148,602
Inventories -- 150,271 38,532 -- 188,803
Current Deferred Tax Asset -- 13,931 547 -- 14,478
Other Current Assets -- 8,958 7,432 -- 16,390
-------- -------- --------- --------- --------
-- 279,948 113,666 -- 393,614
-------- -------- --------- --------- --------
PROPERTY, PLANT AND EQUIPMENT -- 272,900 109,428 -- 382,328
Less: Accumulated Depreciation -- 118,292 29,402 -- 147,694
-------- -------- --------- --------- --------
-- 154,608 80,026 -- 234,634
-------- -------- --------- --------- --------
GOODWILL, NET -- 145,461 100,818 -- 246,279
INVESTMENT IN AND ADVANCES TO SUBSIDIARIES 41,249 -- -- -- 41,249
INVESTMENT IN UNCONSOLIDATED AFFILIATES 673,699 -- -- (673,699) --
INTANGIBLE ASSETS, NET -- 2,948 83 -- 3,031
OTHER ASSETS 5,076 1,283 1,830 -- 8,189
-------- -------- --------- --------- --------
$720,024 $584,248 $ 296,423 $(673,699) $926,996
======== ======== ========= ========= ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-Term Borrowings and Current Portion of Long-
Term Debt $ -- $ 13,755 $ 4,383 $ -- $ 18,138
Accounts Payable -- 49,594 12,072 -- 61,666
Current Deferred Tax Liability -- -- 6,259 -- 6,259
Other Accrued Liabilities 11,772 38,305 27,366 -- 77,443
-------- -------- --------- --------- --------
11,772 101,654 50,080 -- 163,506
-------- -------- --------- --------- --------
LONG-TERM DEBT 199,039 2,204 333 -- 201,576
DEFERRED INCOME TAXES -- 23,424 16,004 -- 39,428
MINORITY INTEREST -- -- 9,008 -- 9,008
OTHER LONG-TERM LIABILITIES 7,909 2,682 1,582 -- 12,173
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY 501,304 454,284 219,416 (673,699) 501,305
-------- -------- --------- --------- --------
$720,024 $584,248 $ 296,423 $(673,699) $926,996
======== ======== ========= ========= ========

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
(IN THOUSANDS)

NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------

REVENUES.............................................. $ -- $ 167,007 $ 25,902 $ -- $ 192,909
---------- ---------- --------- -------- ----------
COSTS AND EXPENSES:
Cost of Sales........................................ -- 135,315 13,533 -- 148,848
Selling, General and Administrative.................. -- 14,547 3,707 -- 18,254
Equity Income in Unconsolidated Affiliates........... (2,848) -- -- -- (2,848)
---------- ---------- --------- -------- ----------
(2,848) 149,862 17,240 -- 164,254
---------- ---------- --------- -------- ----------
OPERATING INCOME...................................... 2,848 17,145 8,662 -- 28,655
---------- ---------- --------- -------- ----------
OTHER INCOME (EXPENSE):
Interest Expense..................................... (5,306) (1,536) (181) -- (7,023)
Equity in Subsidiaries, Net of Taxes................. 15,595 -- -- (15,595) --
Other, Net........................................... -- (155) 300 -- 145
---------- ---------- --------- -------- ----------
10,289 (1,691) 119 (15,595) (6,878)
---------- ---------- --------- -------- ----------
INCOME (LOSS) BEFORE INCOME TAXES..................... 13,137 15,454 8,781 (15,595) 21,777
INCOME TAX (PROVISION) BENEFIT........................ 860 (3,320) (5,048) -- (7,508)
---------- ---------- --------- -------- ----------
NET INCOME (LOSS) BEFORE MINORITY INTEREST............ 13,997 12,134 3,733 (15,595) 14,269
MINORITY INTEREST..................................... -- -- (272) -- (272)
---------- ---------- --------- -------- ----------
NET INCOME (LOSS)..................................... $ 13,997 $ 12,134 $ 3,461 $(15,595) $ 13,997
========== ========== ========= ======== ==========

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
(IN THOUSANDS)

NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------

REVENUES............................................. $ -- $ 134,581 $ 34,020 $ -- $ 168,601
---------- ---------- --------- -------- ----------
COSTS AND EXPENSES:
Cost of Sales...................................... -- 106,523 22,696 -- 129,219
Selling, General and Administrative................ -- 17,335 3,878 -- 21,213
Equity Income in Unconsolidated Affiliates......... (1,284) -- -- -- (1,284)
Other Charges...................................... -- 5,745 1,300 -- 7,045
---------- ---------- --------- -------- ----------
(1,284) 129,603 27,874 -- 156,193
----------- ---------- --------- -------- ----------
OPERATING INCOME..................................... 1,284 4,978 6,146 -- 12,408
---------- ---------- --------- -------- ----------
OTHER INCOME (EXPENSE):
Interest Expense................................... (5,155) (866) (62) -- (6,083)
Equity in Subsidiaries, Net of Taxes............... 6,472 -- -- (6,472) --
Other, Net......................................... -- 330 (451) -- (121)
---------- ---------- ---------- -------- ----------
1,317 (536) (513) (6,472) (6,204)
---------- ----------- ---------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................... 2,601 4,442 5,633 (6,472) 6,204
INCOME TAX (PROVISION) BENEFIT....................... 1,278 (5,185) 2,228 -- (1,679)
---------- ----------- --------- -------- ----------
NET INCOME (LOSS) BEFORE MINORITY INTEREST........... 3,879 (743) 7,861 (6,472) 4,525
MINORITY INTEREST.................................... -- -- (646) -- (646)
---------- ---------- ---------- -------- ----------
NET INCOME (LOSS).................................... $ 3,879 $ (743) $ 7,215 $ (6,472) $ 3,879
========== =========== ========= ========= ==========

15

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
(IN THOUSANDS)

NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------

REVENUES.............................................. $ -- $ 300,727 $ 48,833 $ -- $ 349,560
---------- ---------- --------- -------- ----------
COSTS AND EXPENSES:
Cost of Sales....................................... -- 258,059 25,236 -- 283,295
Selling, General and Administrative................. -- 28,105 7,313 -- 35,418
Equity Income in Unconsolidated Affiliates.......... (4,832) -- -- -- (4,832)
Other Charges....................................... -- 32,280 -- -- 32,280
---------- ---------- --------- -------- ----------
(4,832) 318,444 32,549 -- 346,161
---------- ---------- --------- -------- ----------
OPERATING INCOME (LOSS)............................... 4,832 (17,717) 16,284 -- 3,399
---------- ----------- --------- -------- ----------
OTHER INCOME (EXPENSE):
Interest Expense.................................... (10,572) (2,995) (326) -- (13,893)
Equity in Subsidiaries, Net of Taxes................ (4,477) -- -- 4,477 --
Other, Net.......................................... -- (1,013) 289 -- (724)
---------- ----------- --------- -------- -----------
(15,049) (4,008) (37) 4,477 (14,617)
----------- ----------- ---------- -------- -----------
INCOME (LOSS) BEFORE INCOME TAXES..................... (10,217) (21,725) 16,247 4,477 (11,218)
INCOME TAX (PROVISION) BENEFIT........................ 2,397 9,830 (8,188) -- 4,039
---------- ---------- ---------- -------- ----------
NET INCOME (LOSS) BEFORE MINORITY INTEREST............ (7,820) (11,895) 8,059 4,477 (7,179)
MINORITY INTEREST..................................... -- -- (641) -- (641)
---------- ---------- ---------- -------- -----------
NET INCOME (LOSS)..................................... $ (7,820) $ (11,895) $ 7,418 $ 4,477 $ (7,820)
=========== =========== ========= ======== ===========

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
(IN THOUSANDS)

NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------

REVENUES.............................................. $ -- $ 259,675 $ 60,977 $ -- $ 320,652
---------- ---------- --------- -------- ----------
COSTS AND EXPENSES:
Cost of Sales....................................... -- 208,829 37,236 -- 246,065
Selling, General and Administrative................. -- 32,373 7,928 -- 40,301
Equity Income in Unconsolidated Affiliates.......... (3,640) -- -- -- (3,640)
Other Charges....................................... -- 5,745 1,300 -- 7,045
---------- ---------- --------- -------- ----------
(3,640) 246,947 46,464 -- 289,771
----------- ---------- --------- -------- ----------
OPERATING INCOME...................................... 3,640 12,728 14,513 -- 30,881
---------- ---------- --------- -------- ----------
OTHER INCOME (EXPENSE):
Interest Expense.................................... (10,206) (1,798) (254) -- (12,258)
Equity in Subsidiaries, Net of Taxes................ 15,838 -- -- (15,838) --
Other, Net.......................................... -- 236 (462) -- (226)
---------- ---------- ---------- -------- -----------
5,632 (1,562) (716) (15,838) (12,484)
---------- ----------- ---------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAXES..................... 9,272 11,166 13,797 (15,838) 18,397
INCOME TAX (PROVISION) BENEFIT........................ 2,167 1,978 (9,848) -- (5,703)
---------- ---------- ---------- -------- -----------
NET INCOME (LOSS) BEFORE MINORITY INTEREST............ 11,439 13,144 3,949 (15,838) 12,694
MINORITY INTEREST..................................... -- -- (1,255) -- (1,255)
---------- ---------- ---------- -------- -----------
NET INCOME (LOSS)..................................... $ 11,439 $ 13,144 $ 2,694 $(15,838) $ 11,439
========== ========== ========= ========= ==========

16

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
(IN THOUSANDS)

NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided (Used) by Operating Activities........ $ 11,196 $ (17,701) $ 11,650 $ -- $ 5,145
--------- --------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Business, Net of Cash Acquired........... -- -- (905) -- (905)
Capital Expenditures for Property, Plant &
Equipment............................................. -- (10,218) (2,840) -- (13,058)
--------- --------- --------- ----------- ----------
Net Cash Used by Investing Activities............. -- (10,218) (3,745) -- (13,963)
--------- --------- --------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on Revolving Credit Facility................. -- 28,389 (191) -- 28,198
Repayments on Debt...................................... (10,832) (1,322) (366) -- (12,520)
Proceeds from Stock Option Exercises.................... 565 -- -- -- 565
Purchases of Treasury Stock............................. (929) -- -- -- (929)
--------- --------- --------- ----------- ---------
Net Cash (Used) Provided by Financing
Activities...................................... (11,196) 27,067 (557) -- 15,314
--------- --------- ---------- ----------- ---------

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS........................................ -- (852) 7,348 -- 6,496
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............ -- 4,154 4,161 -- 8,315
--------- --------- --------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD............ $ -- $ 3,302 $ 11,509 $ $ 14,811
========= ========= ========= ============ =========

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
(IN THOUSANDS)

NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities............... $ 6,241 $ 63,265 $ 11,953 $ -- $ 81,459
--------- ---------- --------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of Businesses, Net of Cash Acquired ....... -- -- 2,344 -- 2,344
Investments in Unconsolidated Affiliates................ -- (499) (737) -- (1,236)
Capital Expenditures for Property, Plant &
Equipment............................................. -- (17,150) (4,665) -- (21,815)
--------- ---------- ---------- ----------- ----------
Net Cash (Used) Provided by Investing Activities.. -- (17,649) (3,058) -- (20,707)
--------- ---------- ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on Revolving Credit Facility................. -- (42,600) (74) -- (42,674)
Repayments on Debt...................................... (6,056) (3,094) (233) -- (9,383)
Purchases from Stock Option Exercises................... 1,142 -- -- -- 1,142
Purchases of Treasury Stock............................. (1,327) -- -- -- (1,327)
---------- --------- --------- ----------- ----------
Net Cash Used by Financing Activities............. (6,241) (45,694) (307) -- (52,242)
---------- ---------- ---------- ----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. -- (78) 8,588 -- 8,510
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............ -- 1,905 8,479 -- 10,384
--------- --------- --------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD............ $ -- $ 1,827 $ 17,067 $ $ 18,894
========= ========= ========= ============ =========

17

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion is intended to assist you in understanding our
financial position as of December 31, 2001 and June 30, 2002, and our results of
operations for each of the three and six months ended June 30, 2001 and 2002.
This discussion should be read with our financial statements and their notes
included elsewhere in this report as well as our financial statements and
related Management's Discussion and Analysis of Financial Condition and Results
of Operations for the year ended December 31, 2001, previously filed with the
Securities and Exchange Commission in our Annual Report on Form 10-K.

Our discussion of our results of operations and financial condition
contains statements relating to our future results, including certain
projections and trends, which constitute forward-looking statements. Certain
risks and uncertainties may cause actual results to be materially different from
projected results contained in these forward-looking statements and other
disclosures. These risks and uncertainties are more fully described under
"Forward-Looking Statements and Exposures" below. As used herein, unless
otherwise required by the context, the term "Grant Prideco" refers to Grant
Prideco, Inc. and the terms "we," "our," and similar words refer to Grant
Prideco and its subsidiaries. The use herein of such terms as "group,"
"organization," "we," "us," "our," and "its," or references to specific
entities, are not intended to be a precise description of corporate
relationships.

GENERAL

Grant Prideco is the world's largest manufacturer and supplier of oilfield
drill pipe and other drill stem products and one of the leading North American
providers of high-performance premium connections and tubular products. We also
provide a variety of products and services to the growing world-wide offshore
and deepwater market through our marine products and services segment. Our drill
stem products are used to drill oil and gas wells, while our premium connections
and tubular products are used primarily to complete oil and gas wells once they
have been successfully drilled. Our marine products and services are used for
subsea construction, installation, and production. Our customers include major,
independent, and state-owned oil companies, drilling contractors, oilfield
service companies, and North American oil country tubular goods (OCTG)
distributors. We operate 24 manufacturing facilities located in the United
States, Mexico, Canada, China, Norway, Europe, and Asia, and 30 sales, service,
and repair locations globally.

We operate through three primary business segments: (1) drilling products
and services, (2) premium connections and tubular products and (3) marine
products and services. We also provide drill pipe and casing used in the fiber
optic, construction, and water well industries and are involved in several joint
ventures to develop various technologies.

For the six months ended June 30, 2002, 52% of our revenues were derived
from our drilling products and services segment, 35% from our premium
connections and tubular products segment, 9% from our marine products and
services segment, and 4% from our other operations. Substantially all of our
revenues in our premium connections and tubular products segment are generated
in North America. Although most of our drilling product sales are made from our
North American locations, we estimate that more than 70% of our oilfield drill
stem revenues in the second quarter of 2002 were for use in the international
and offshore markets.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In our annual report on Form 10-K for the year ended December 31, 2001, we
identified our most critical accounting policies upon which our financial status
depends as those relating to revenue recognition, accounts receivable valuation,
inventory valuation, business combinations, impairment of long-lived assets and
estimates related to contingent liabilities and future claims. There have been
no significant changes to any of our critical accounting policies.

MARKET TRENDS AND OUTLOOK

Our business is materially dependent on drilling and production activity and
the associated demand for our drilling products, premium connections and tubular
products, and marine products and services. Generally, demand for our products
is a function of current drilling and completion activity as well as
expectations of future activity. Demand for our drill stem products closely
follows, with some lag, the domestic and international rig counts, which in turn
follow the prices of oil and gas. Demand for our premium connections and tubular
products closely follows the United States gas rig count and Gulf of Mexico rig
count. Demand for our marine products and services follows the level of offshore
and deepwater drilling and development activity and

18

our success in capturing a share of these markets. Offshore activity is less
sensitive to short-term changes in oil and natural gas prices, as these projects
are long-term and capital intensive, and activity levels are more dependent on
long-term forecasts for oil and gas prices.

Prices for oil and natural gas have been and continue to be volatile, and
material declines adversely affect the demand for our products and services. The
following table sets forth certain information with respect to oil and natural
gas prices and the North American (U.S. and Canadian) and international rig
counts:

THREE MONTHS ENDED
--------------------------------------------------
JUNE 30, 2001 DECEMBER 31, 2001 JUNE 30, 2002
------------- ----------------- -------------

WTI Oil(a)
Average(d).......................................... $ 27.88 $ 20.46 $ 26.29
Ending.............................................. 26.26 19.84 26.86
Henry Hub Gas(b)
Average(d).......................................... $ 4.35 $ 2.42 $ 3.39
Ending.............................................. 2.98 2.70 3.21
North American Rig Count(c)
Average ............................................ 1,489 1,282 953
Ending ............................................. 1,597 1,085 1,090
International Rig Count(c)
Average ............................................ 751 748 725
Ending ............................................. 760 752 730

- ----------
(a) Price per barrel of West Texas Intermediate (WTI) crude. Source: U.S. Energy
Information Administration.

(b) Price per MMBtu. Source: U.S. Energy Information Administration.

(c) Source: Baker Hughes Rig Count (International Rig Count excludes China
and the former Soviet Union).

Production from new wells is declining at steeper rates compared to
historical levels. These increasing rates of decline, combined with a slow-down
in drilling activity, have contributed to a fall in natural gas production over
the second half of 2001 and the first half of 2002. We believe this production
decline will continue through the end of 2002 due to production decline rates
and the sharp fall in North American natural gas drilling that has occurred
since the second quarter of last year. If these production declines continue,
and demand improves with an improved economy, natural gas prices will likely
improve, which should result in increased drilling activity. We also believe
that factors in North America relating to long-term natural gas demand indicate
that the North American rig count should increase in order for natural gas
production to meet expected future domestic demand.

Current market information indicates that the United States and North
American rig counts may have begun their recovery from the downturn which began
in mid 2001. The United States rig count has increased from around 740 in early
April to around 850 in early August, 2002. We expect drilling activity to
strengthen throughout the remainder of 2002. Specifically, we expect that the
United States rig count will average around 860 rigs in the third quarter of
2002 and will rise to an average of around 950 in the fourth quarter. During the
second half of 2002, we anticipate continued improvement in international
drilling activity as well. As we look toward 2003, we expect that activity
levels will continue strengthening.

Overall, we are positive on the prospects for our businesses and industry
towards the end of 2002 and 2003. We believe that oil and gas production decline
rates in the United States are increasing, and the trends towards offshore,
deeper, and more complex wells are positive indicators for our products and
services. However, total company backlog at the end of the second quarter was
$96.8 million compared to $116.8 million at the end of the first quarter. In the
short-term, we expect our earnings to be down for the third quarter of 2002 and
to improve beginning in the fourth quarter, as the United States and worldwide
rig counts continue improving. Our results, however, will be dependent upon the
rate of improvement in the rig counts during the remainder of the year and
customers' expectations for the rig counts in 2003. Our expectations are highly
dependent on our customers increasing their order rates, in particular North
American land drillers and OCTG distributors.

19

During the third quarter, we expect our premium business to continue
showing improvements in some of its markets, but that will not fully offset
anticipated third quarter declines in our drilling products segment. We
currently expect to sell between 900 thousand to 1.1 million feet of drill pipe
during the third quarter (excluding China). As these amounts are higher than our
drill pipe backlog entering the quarter of approximately 850 thousand feet, some
of which is scheduled for shipment after the third quarter, we will need to book
and ship additional orders during the third quarter to meet these projections.
Based on the above assumptions and other factors described below under
"Forward-Looking Statements and Exposures," we currently expect earnings to be
in the range of $0.01 to $0.04 per share in the third quarter of 2002.

During the third quarter, we expect our drilling products segment bookings,
an indicator of future activity, to be positively affected by two factors.
First, we expect to see decreases in our customers' drill pipe inventory levels.
Second, we believe our customers' expectations for future rig count activity
will improve. These factors should positively affect our bookings during the
quarter and improve our backlog position. Our results in the fourth quarter will
be heavily dependent on the level of our backlog entering that quarter and the
extent to which there is an improvement in activity levels in our premium
connections and tubular products segment. We currently expect that our fourth
quarter earnings will improve to approximately $0.07 to $0.12 per share. A delay
in the assumed increase in the rig count and customers purchasing decisions
could push out our expected improvements.

The above forward-looking information with respect to our outlook for
fiscal 2002 is subject to various assumptions that are more specifically set
forth below under "Forward-Looking Statements and Exposures." There can be no
assurance that our expectations for future results will in fact occur or that
our results will not be materially different. We do, however, believe that our
current expectations are reasonable.

RESULTS OF OPERATIONS

First Quarter 2001 Charges

In the first quarter of 2001, we incurred approximately $43.0 million of
pre-tax charges, $28.0 million net of tax, associated with our review of the
continued viability of our manufacturing arrangement with Oil Country Tubular
Ltd. (OCTL) in India, a modification of our manufacturing standards and costing
in light of current market conditions, and an ongoing restructuring of our
operations. This charge also included executive severance payments and related
expenses of approximately $14.6 million, all of which were paid in 2001. These
charges are summarized in the following chart:

DRILLING PREMIUM MARINE
PRODUCTS CONNECTIONS PRODUCTS
AND AND TUBULAR AND
SERVICES PRODUCTS SERVICES OTHER CORPORATE TOTAL
-------- -------- -------- ----- --------- -----
(IN THOUSANDS)

OCTL Write-Off(a)............. $ 17,727 $ -- $ -- $ -- $ -- $ 17,727
Inventory Write-Off(b)........ 3,357 -- 1,692 1,125 -- 6,174
Write-Off of Capitalized
Manufacturing Variances(c).. 1,024 509 272 2,767 -- 4,572
Severance(d).................. 108 -- 205 75 14,165 14,553
--------- ----- ------- -------- -------- ---------
Total..................... $ 22,216 $ 509 $ 2,169 $ 3,967 $ 14,165 $ 43,026
========= ===== ======= ======== ======== =========

(a) In connection with our operational review conducted in 2001, we reassessed
the viability of restructuring our relationship with OCTL in India and
determined that a continued relationship was no longer viable. As a result
of this determination, we wrote-off the remaining $17.7 million ($11.5
million after-tax) of unpaid receivables and advances owed to us by OCTL.

(b) The inventory write-off was reported as cost of sales and was made pursuant
to a review of our planned dispositions of inventory in an effort to reduce
inventory levels of older, slow-moving products. The amount was determined
by use of internal appraisals and evaluations to assess the estimated net
realizable value upon disposal and also included a charge related to certain
inventory purchase contract obligations with above market prices.

(c) Certain capitalized manufacturing cost variances were expensed as cost of
sales in connection with our operational review and revisions of
manufacturing standards and costing during 2001.

(d) The severance charge relates to executive, manufacturing, and marketing
employees terminated in connection with our restructuring plan that was
implemented in 2001. The total number of employees severed was 24, and the
amount accrued for severance was based upon the positions eliminated and our
severance policy.

20

Second Quarter 2002 Charges

Results for the second quarter of 2002 include $7.0 million of pre-tax
charges, $4.9 million net of tax. These charges include $2.6 million related to
fixed asset write-downs and $4.5 million for executive severance payments and
related expenses. These charges are summarized in the following chart (in
thousands):

DRILLING PREMIUM
PRODUCTS CONNECTIONS LIABILITY
AND AND TUBULAR BALANCE
SERVICES PRODUCTS CORPORATE TOTAL 6/30/02
-------- -------- --------- ----- -------

Fixed Asset Write-Downs(a)........... $ 2,360 $ 220 $ -- $ 2,580 $ --
Severance(b)......................... -- -- 4,465 4,465 4,465
--------- --------- --------- --------- ----------
Total............................ $ 2,360 $ 220 $ 4,465 $ 7,045 $ 4,465
========= ========= ======== ========= ==========

(a) The fixed asset write-downs relate to idle assets taken out of service
pursuant to our ongoing automation and efficiency initiatives and are
classified as held for sale. The amount was determined by use of internal
appraisals and evaluations to assess the estimated fair value upon
disposition. The equipment, which has a carrying value of $0.2 million, is
expected to be disposed of in the next 12 months.

(b) The severance charge relates to an executive employee terminated during June
2002. The amount accrued for severance was based upon the terminated
employee's employment contract, which was paid in July 2002.

21

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2001

General

CONSOLIDATED RESULTS

Net income was $3.9 million ($0.03 per share) on revenues of $168.6 million
in the second quarter of 2002, compared to net income of $14.0 million ($0.13
per share) on revenues of $192.9 million in the second quarter of 2001. Second
quarter of 2002 earnings include charges totaling $4.9 million ($0.03 per share)
related to fixed asset write-downs of $1.8 million and severance costs of $3.1
million. Prior year net income includes goodwill amortization of $1.6 million
($0.01 per share). The Company adopted the new goodwill accounting standard,
which ceases the amortization of goodwill, as of January 1, 2002.

THREE MONTHS ENDED JUNE 30,
---------------------------
2001 2002
---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)

Revenues.............................................................. $ 192,909 $ 168,601
Gross Profit.......................................................... 44,061 39,382
Gross Profit %........................................................ 22.8% 23.4%
Selling, General, and Administrative.................................. $ 18,254 $ 21,213
Selling, General, and Administrative %................................ 9.5% 12.6%
Operating Income...................................................... $ 28,655 $ 12,408(a)
Operating Income %.................................................... 14.9% 7.4%(a)
Operating Income, Before Other Charges................................ $ 28,655 $ 16,873(b)
Operating Income %, Before Other Charges.............................. 14.9% 10.0%(b)
Net Income............................................................ $ 13,997 $ 3,879
EBITDA, Before Other Charges(c)....................................... 37,726 24,600(b)

- ----------
(a) Includes $4.5 million of charges related to Corporate in the second quarter
of 2002 for executive severance costs.

(b) Excludes $4.5 million of charges discussed in (a) above.

(c) We calculate EBITDA by taking operating income and adding back depreciation
and amortization, excluding the impact of other charges. Calculations of
EBITDA should not be viewed as a substitute to calculations under GAAP, in
particular operating income and net income. In addition, EBITDA calculations
by one company may not be comparable to another company.

SEGMENT RESULTS

Drilling Products and Services Segment

The following table sets forth certain data regarding the results of our
drilling products and services segment for the three months ended June 30, 2001
and 2002:

THREE MONTHS ENDED JUNE 30,
---------------------------
2001 2002
--------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)

Revenues........................................................... $ 95,803 $ 88,574
Gross Profit....................................................... 23,025 25,490
Gross Profit %..................................................... 24.0% 28.8%
Selling, General, and Administrative............................... $ 4,987 $ 5,796
Selling, General, and Administrative %............................. 5.2% 6.5%
Operating Income................................................... $ 20,977 $ 19,469
Operating Income %................................................. 21.9% 22.0%
Operating Income, Before Other Charges............................. $ 20,977 $ 19,469
Operating Income %, Before Other Charges........................... 21.9% 22.0%
EBITDA, Before Other Charges(a).................................... $ 24,763 $ 22,577

- ----------
(a) We calculate EBITDA by taking operating income and adding back depreciation
and amortization, excluding the impact of other charges. Calculations of
EBITDA should not be viewed as a substitute to calculations under GAAP, in
particular operating income and net income. In addition, EBITDA calculations
by one company may not be comparable to another company.

22

Our drilling products and services segment consists of our oilfield drill
stem products for the oil and gas industry, including drill pipe products
(including tool joints), drill collars, heavy weight drill pipe, and
accessories. The following table sets forth certain additional product line
revenue data for three months ended June 30, 2001 and 2002:

THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------
2001 2002
------------------------- ------------------------
% OF REV. % OF REV.
--------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)

REVENUES
Drill Pipe Products.................................... $ 71,964 75% $ 75,006 85%
Drill Collars and Heavy Weight Drill Pipe.............. 16,340 17% 9,552 11%
Drill Stem Accessories and Other....................... 7,499 8% 4,016 4%
------------ ---- ------------ ----
$ 95,803 100% $ 88,574 100%
============ ==== ============ ====

Revenues. Our drilling products and services revenues decreased $7.2
million, or 8%, in the second quarter of 2002 as compared to the same period in
2001. This decrease is primarily due to the 36% decline in the North American
rig count, which contributed to the 40% decline in our drill pipe footage sold.
However, due to sales mix toward international and offshore markets, which tend
to purchase our higher-priced, more technologically-advanced products, coupled
with an overall price increase implemented in 2001, our average price received
per foot for drill pipe increased 36%. Also included in the second quarter of
2002 are revenues of $14.2 million from our Chinese joint venture, in which we
purchased a controlling interest at the end of the first quarter of 2002.

Gross Profit. Our drilling products and services gross profit increased
$2.5 million in the second quarter of 2002 as compared to the same period in
2001. This gross profit improvement was primarily due to the 36% increase in
average price received per foot for drill pipe in the second quarter of 2002
over last year's second quarter and gross profit contributed by our Chinese
joint venture.

Selling, General, and Administrative. Our selling, general, and
administrative expenses for our drilling products and services segment increased
as a percentage of revenues from 5% in the second quarter of 2001 to 7% in the
second quarter of 2002 primarily due to increased international sales
commissions.

Operating Income. Our drilling products and services segment operating
income decreased $1.5 million, or 7%, in the second quarter of 2002 as compared
to the same period in 2001. This decrease is primarily due to the decline in the
North American rig count partially offset by increased drill pipe pricing and
operating income from our Chinese joint venture. Also included in operating
income in the second quarter of 2002 are fixed asset write-downs of $2.4 million
related to our efficiency and automation initiatives primarily at our operations
located in Mexico. Included in the second quarter of 2001 is goodwill
amortization of $0.8 million.

Premium Connections and Tubular Products Segment

The following table sets forth certain data regarding the results of our
premium connections and tubular products segment for the three months ended June
30, 2001 and 2002:

THREE MONTHS ENDED JUNE 30,
---------------------------------
2001 2002
------------ ------------
(IN THOUSANDS, EXCEPT
PERCENTAGES)

Revenues............................................... $ 75,779 $ 58,067
Gross Profit........................................... 17,931 9,946
Gross Profit %......................................... 23.7% 17.1%
Selling, General, and Administrative................... $ 4,308 $ 4,046
Selling, General, and Administrative %................. 5.7% 7.0%
Operating Income....................................... $ 13,623 $ 5,680
Operating Income %..................................... 18.0% 9.8%
Operating Income, Before Other Charges................. $ 13,623 $ 5,680
Operating Income %, Before Other Charges............... 18.0% 9.8%
EBITDA, Before Other Charges(a)........................ $ 16,846 $ 8,715

- ----------
(a) We calculate EBITDA by taking operating income (loss) and adding back
depreciation and amortization, excluding the impact of other charges.
Calculations of EBITDA should not be viewed as a substitute to calculations
under GAAP, in particular operating income, and net income. In addition,
EBITDA calculations by one company may not be comparable to another company.

23

Our premium connections and tubular products segment consists of four
principal product lines: (1) Atlas Bradford(R) premium threading and tubing, (2)
TCA(TM) critical-service casing and processing, (3) Tube-Alloy(TM) premium
accessories, and (4) Texas Arai couplings. The following table sets forth
certain additional data regarding these product lines for the three months ended
June 30, 2001 and 2002:

THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------
2001 2002
--------------------------- ---------------------------
% OF REV. % OF REV.
--------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)

REVENUES
Atlas Bradford(R) Threading and
Service........................................ $ 23,356 31% $ 26,436 45%
TCA(TM)........................................... 24,420 32% 12,396 21%
Tube-Alloy(TM).................................... 12,775 17% 11,682 20%
------------ ---- ------------ ----
60,551 80% 50,514 86%
------------ ---- ------------ ----
Texas Arai........................................ 15,228 20% 7,553 14%
------------ ---- ------------ ----
$ 75,779 100% $ 58,067 100%
============ ==== ============ ====
GROSS PROFIT
Atlas Bradford(R) Threading and
Service........................................ $ 6,249 27% $ 4,699 18%
TCA(TM)........................................... 5,283 22% 1,586 13%
Tube-Alloy(TM).................................... 3,657 29% 3,481 30%
------------ ------------
15,189 25% 9,766 19%
------------ ------------
Texas Arai........................................ 2,742 18% 180 2%
------------ ------------
$ 17,931 24% $ 9,946 17%
============ ============
SELLING, GENERAL, AND
ADMINISTRATIVE
Atlas Bradford(R) Threading and
Service........................................ $ 1,807 8% $ 1,654 6%
TCA(TM)........................................... 408 2% 437 4%
Tube-Alloy(TM).................................... 1,119 9% 1,313 11%
------------ ------------
3,334 6% 3,404 7%
------------ ------------
Texas Arai........................................ 974 6% 642 8%
------------ ------------
$ 4,308 6% $ 4,046 7%
============ ============
OPERATING INCOME (LOSS)
Atlas Bradford(R) Threading and
Service........................................ $ 4,442 19% $ 2,825 11%
TCA(TM)........................................... 4,875 20% 1,149 9%
Tube-Alloy(TM).................................... 2,538 20% 2,168 19%
------------ ------------
11,855 22% 6,142 12%
------------ ------------
Texas Arai........................................ 1,768 12% (462) (6)%
------------ -------------
$ 13,623 18% $ 5,680 10%
============ ============
OPERATING INCOME (LOSS), BEFORE OTHER
CHARGES
Atlas Bradford(R) Threading and
Service........................................ $ 4,442 19% $ 2,825 11%
TCA(TM)........................................... 4,875 20% 1,149 9%
Tube-Alloy(TM).................................... 2,538 20% 2,168 19%
------------ ------------
11,855 22% 6,142 12%
------------ ------------
Texas Arai........................................ 1,768 12% (462) (6)%
------------ -------------
$ 13,623 18% $ 5,680 10%
============ =============

- ----------

Revenues. Our premium connections and tubular products revenues decreased
$17.7 million, or 23%, in the second quarter of 2002 as compared to the same
period in 2001. Revenues in this segment were negatively affected by the 35%
decline in the United States gas rig count when compared to last year's second
quarter. This decrease in market activity primarily affected revenues at our
TCA(TM) critical-service casing and Texas Arai coupling businesses, which are
both heavily dependent on distributor and steel mill activity. Partially
offsetting this decrease was increased revenues at our Atlas-Bradford(R)
Threading and Service business.

Gross Profit. Our premium connections and tubular products gross profit
decreased $8.0 million, or 45%, in the second quarter of 2002 as compared to the
same period in 2001. This decrease reflects the 35% decline in the United States
gas rig count when compared to last year's second quarter, unabsorbed
manufacturing costs incurred to maintain capacity for an expected industry
upturn and unfavorable product mix, particularly at TCA(TM) and Texas Arai.

Selling, General, and Administrative. Our selling, general, and
administrative expenses for our premium connections and tubular products segment
increased as a percentage of revenues from 6% in the second quarter of 2001 to
7% in the second quarter of 2002 primarily due to the decreased revenue base.

24

Operating Income (Loss). Our premium connections and tubular products
operating income decreased $7.9 million, or 58%, in the second quarter of 2002
as compared to the same period in 2001. This decrease reflects the 35% decline
in the United States gas rig count when compared to last year's second quarter,
unabsorbed manufacturing costs incurred to maintain capacity for an expected
industry upturn, and unfavorable product mix, particularly at TCA(TM) and Texas
Arai. Also included in the second quarter of 2002 operating income are fixed
asset write-downs of $0.2 million related to assets held for sale. Included in
the second quarter of 2001 is goodwill amortization of $0.6 million.

Marine Products and Services Segment

The following table sets forth certain data regarding the results of our
marine products and services segment for the three months ended June 30, 2001
and 2002:

- ----------
(a) We calculate EBITDA by taking operating income (loss) and adding back
depreciation and amortization, excluding the impact of other charges.
Calculations of EBITDA should not be viewed as a substitute to calculations
under GAAP, in particular operating income and net income. In addition,
EBITDA calculations by one company may not be comparable to another company.

Revenues. Our other operations revenues decreased $4.2 million, or 38%, in
the second quarter of 2002 as compared to the same period in 2001. This decrease
in revenues is from our industrial drill pipe operations due to decreased
activity levels related to depressed fiber optic installation and construction
markets.

Gross Profit. Our gross profit in our other operations decreased $1.0
million as compared to the same period in 2001. This decrease reflects the
continued deterioration of the industrial market.

Selling, General, and Administrative. Our selling, general, and
administrative expenses for our other operations decreased as a percentage of
revenues from 14% in the second quarter of 2001 to 9% in the second quarter of
2002. This decrease is primarily due to the closing of our Stephenville, Texas
plant in the fourth quarter of 2001.

Operating Loss. Our other operations operating loss increased $0.9 million
as compared to the same period in 2001. This reflects the decreased activity
levels with our industrial product line offset by efficiencies obtained in our
organizational restructuring that took place in the fourth quarter of 2001. Also
included in our other operations for the second quarter of 2002 is approximately
$0.9 million in research and development costs associated with our two
technology joint ventures as compared to $0.1 million in the same period in
2001. Included in the second quarter of 2001 is goodwill amortization of $0.1
million.

OTHER ITEMS

Corporate General and Administrative. Our corporate general and
administrative expenses increased as a percentage of revenues from 3% in the
second quarter of 2001 to 4% in the second quarter of 2002. This increase was
due primarily to increased headcount and related expenses as we continue to
develop the infrastructure of a stand-alone public company following our
spin-off from Weatherford in April 2000.

Interest Expense. Our interest expense decreased $0.9 million in the second
quarter of 2002 due to a decrease in the interest rate related to our Credit
Facility, from an average of 7.6% in the second quarter of 2001 to an average of
4.5% in the second quarter of 2002, and lower debt balances.

Tax (Provision) Benefit. Our effective tax rate for the second quarter of
2002 was 27% as compared to 35% for the same period in 2001. This decrease in
the effective tax rate is due primarily to the effects of ceasing goodwill
amortization effective January 1, 2002 and a lowering of the estimated effective
tax rate for 2002 from 33% in the first quarter of 2002 to 31% in the second
quarter of 2002.

26

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001

General

CONSOLIDATED RESULTS

Net income was $11.4 million ($0.10 per share) on revenues of $320.7
million for the six months ended June 30, 2002, compared to a net loss of $7.8
million ($0.07 per share) on revenues of $349.6 million for the same period in
2001. For the six months ended June 30, 2002, earnings include charges totaling
$4.9 million ($0.03 per share) related to fixed asset write-downs of $1.8
million and severance costs of $3.1 million. For the six months ended June 30,
2001, earnings include charges of $28.0 million ($0.26 per share) related to our
2001 restructuring plan to improve profitability and efficiency and include
goodwill amortization of $3.2 million ($0.03 per share). The Company adopted the
new goodwill accounting standard, which ceases the amortization of goodwill, as
of January 1, 2002.

- ----------
(a) Includes other charges of $10.9 million related to inventory write-offs and
capitalized manufacturing variance write-offs, which were classified as
cost of sales.

(b) Includes other charges of $14.1 million related to severance of executive,
manufacturing, and marketing employees terminated in connection with our
restructuring plan that was implemented in the first quarter of 2001.

(c) Includes other charges of $18.0 million to write-off our assets related to
our manufacturing arrangement with OCTL in India of $17.7 million and
severance and related expenses of $0.3 million.

(d) Excludes $43.0 million of other charges discussed in (a), (b), and (c)
above.

(e) Includes $4.5 million of charges related to Corporate in the second quarter
of 2002 for executive severance costs.

(f) Excludes $4.5 million of charges discussed in (e) above.

(g) We calculate EBITDA by taking operating income (loss) and adding back
depreciation and amortization, excluding the impact of other charges.
Calculations of EBITDA should not be viewed as a substitute to calculations
under GAAP, in particular operating income and net income. In addition,
EBITDA calculations by one company may not be comparable to another
company.

27

SEGMENT RESULTS

Drilling Products and Services Segment

The following table sets forth certain data regarding the results of our
drilling products and services segment for the six months ended June 30, 2001
and 2002:

- ----------
(a) Includes other charges of $4.4 million related to inventory write-offs and
capitalized manufacturing variance write-offs which were classified as cost
of sales.

(b) Includes other charges of $17.8 million to write-off our assets related to
our manufacturing arrangement with OCTL in India of $17.7 million and
severance and related expenses of $0.1 million.

(c) Excludes $22.2 million of other charges discussed in (a) and (b) above.

(d) We calculate EBITDA by taking operating income (loss) and adding back
depreciation and amortization, excluding the impact of other charges.
Calculations of EBITDA should not be viewed as a substitute to calculations
under GAAP, in particular operating income and net income. In addition,
EBITDA calculations by one company may not be comparable to another
company.

Our drilling products and services segment consists of our oilfield drill
stem products for the oil and gas industry, including drill pipe products
(including tool joints), drill collars, heavy weight drill pipe, and
accessories. The following table sets forth certain additional product line
revenue data for the six months ended June 30, 2001 and 2002:

Revenues. Our drilling products and services revenues increased $5.2
million for the six months ended June 30, 2002 as compared to the same period in
2001. This increase is primarily due to the 40% increase in our average price
received per foot for drill pipe because of sales mix toward international and
offshore markets, which tend to purchase our higher-priced, more
technologically-advanced products, coupled with an overall price increase
implemented in 2001. However, this increase was partially offset by the 31%
decline in the North American rig count, which contributed to the 31% decline in
our drill pipe footage sold. Also included in 2002 are revenues of $14.2 million
from our Chinese joint venture, in which we purchased a controlling interest at
the end of the first quarter of 2002.

Gross Profit. Our drilling products and services gross profit increased
$18.1 million, or 57%, for the six months ended June 30, 2002 as compared to the
same period in 2001. This gross profit improvement was primarily due to the 40%
increase in average price received per foot for drill pipe in the first half of
2002 compared to the same period in 2001 coupled with gross profit contributed
by our Chinese joint venture. This increase was partially offset by the 31%
decline in our drill pipe footage sold.

28

Selling, General, and Administrative. Selling, general, and administrative
expenses in our drilling products and services segment remained relatively flat
as a percentage of revenues for the six months ended June 30, 2002 when compared
to the same period in 2001.

Operating Income. Our drilling products and services operating income
increased $32.6 million for the six months ended June 30, 2002 as compared to
the same period in 2001. Included in operating income for the six months ended
June 30, 2001 are $22.2 million of non-recurring charges and goodwill
amortization of $1.6 million. Included in operating income for the six months
ended June 30, 2002 are fixed asset write-downs of $2.4 million related to our
efficiency and automation initiatives primarily at our operations located in
Mexico. Excluding charges and fixed asset write-downs mentioned above and
goodwill amortization, operating income increased $11.2 million year over year.
This increase in operating income reflects the 40% increase in the average price
received per foot for drill pipe over last year, partially offset by a 31%
decrease in drill pipe footage sold. Also included in 2002 is operating income
from our Chinese joint venture.

Premium Connections and Tubular Products Segment

The following table sets forth certain data regarding the results of our
premium connections and tubular products segment for the six months ended June
30, 2001 and 2002:

- ----------
(a) Includes other charges of $0.5 million ($0.3 million for Texas Arai and
$0.2 million for Tube-Alloy(TM)) related to inventory write-offs and
capitalized manufacturing variance write-offs, which were classified as
cost of sales.

(b) Excludes $0.5 million of other charges discussed in (a) above.

Revenues. Our premium connections and tubular products revenues decreased
$34.0 million, or 23%, for the six months ended June 30, 2002 as compared to the
same period in 2001. Revenues in this segment were negatively affected by a 51%
decline in the United States gas rig count when compared to the same period last
year. Additionally, OCTG distributors have been purchasing at low levels in
light of the weak and uncertain market conditions.

Gross Profit. Our premium connections and tubular products gross profit
decreased $18.7 million, or 51%, for the six months ended June 30, 2002 as
compared to the same period in 2001, which includes $0.5 million of
non-recurring charges for the six months ended June 30, 2001. This decrease
reflects the 51% decline in the United States gas rig count when compared to the
same period last

30

year, unabsorbed manufacturing costs incurred to maintain capacity for an
expected industry upturn and unfavorable product mix, particularly at TCA(TM)
and Texas Arai.

Selling, General, and Administrative. Our selling, general, and
administrative expenses for our premium connections and tubular products segment
increased as a percentage of revenues from 6% for the six months ended June 30,
2001 to 7% for the same period in 2002. This increase is primarily due to the
23% decrease in revenues.

Operating Income (Loss). Our premium connections and tubular products
operating income decreased $18.4 million, or 66%, for the six months ended June
30, 2002 as compared to the same period in 2001, which includes $0.5 million of
non-recurring charges for the six months ended June 30, 2001. Included in
operating income for the six months ended June 30, 2002 are fixed asset
write-downs of $0.2 million related to assets held for sale. This decrease
reflects the 51% decline in the United States gas rig count when compared to the
same period in 2002, unabsorbed manufacturing costs incurred to maintain
capacity for an expected industry upturn and unfavorable product mix,
particularly at TCA(TM) and Texas Arai.

Marine Products and Services Segment

The following table sets forth certain data regarding the results of our
marine products and services segment for the six months ended June 30, 2001 and
2002:

- ----------
(a) Includes other charges of $2.0 million related to inventory write-offs and
capitalized manufacturing variance write-offs, which were classified as
cost of sales.

(b) Includes other charges of $0.2 million for severance and related expenses.

(c) Excludes $2.2 million of other charges discussed in (a) and (b) above.

(d) We calculate EBITDA by taking operating income (loss) and adding back
depreciation and amortization, excluding the impact of other charges.
Calculations of EBITDA should not be viewed as a substitute to calculations
under GAAP, in particular operating income and net income. In addition,
EBITDA calculations by one company may not be comparable to another
company.

Revenues. Our marine products and services revenues increased $10.9
million, or 64%, for the six months ended June 30, 2002 as compared to the same
period in 2001. In the first quarter of 2001, we began to strengthen our XL
Systems(TM) products and services sales force, consolidated certain offshore
selling activities, and began to build a broader product line. Additionally, in
the fourth quarter of 2001, we added a new management team and acquired the
Plexus POS-GRIP(TM) wellhead rental product line. These actions, coupled with
the acquisition of Rotator in the second quarter of 2002, resulted in increased
revenues for this segment despite the 32% decrease in the United States offshore
rig count.

Gross Profit. Our marine products and services gross profit increased $5.7
million for the six months ended June 30, 2002 as compared to the same period in
2001, which includes $2.0 million of non-recurring charges in the first quarter
of 2001. This improvement reflects the additional focus initiated in 2001 for
this segment despite the 32% decrease in the United States offshore rig count.

31

Selling, General, and Administrative. Our selling, general, and
administrative expenses for our marine products and services segment increased
as a percentage of revenues from 21% for the six months ended June 30, 2001 to
25% for the same period in 2002. This increase was due to increased selling,
general, and administrative expenses associated with the Rotator and Plexus
acquisitions coupled with costs incurred to develop infrastructure for future
growth of this segment.

Operating Loss. Our marine products and services operating loss decreased
from $3.2 million for the six months ended June 30, 2001 to $0.6 million for the
same period in 2002. Included in the results for 2001 is a non-recurring charge
of $2.2 million and goodwill amortization of $0.2 million. Excluding charges and
goodwill amortization in 2001, the operating loss for this segment decreased
$0.2 million reflecting operating income from the acquisitions of Rotator and
Plexus, partially offset by increased selling, general, and administrative
costs.

Other Operations

The following table sets forth certain data regarding the results of our
other business operations for the six months ended June 30, 2001 and 2002:

- ----------

(a) Includes other charges of $4.0 million related to inventory write-offs and
capitalized manufacturing variance write-offs which were classified as cost
of sales.

(b) Excludes $4.0 million of other charges discussed in (a) above.

(c) We calculate EBITDA by taking operating income (loss) and adding back
depreciation and amortization, excluding the impact of other charges.
Calculations of EBITDA should not be viewed as a substitute to calculations
under GAAP, in particular operating income and net income. In addition,
EBITDA calculations by one company may not be comparable to another
company.

Revenues. Our other operations' revenues decreased $11.0 million, or 44%,
for the six months ended June 30, 2002 as compared to the same period in 2001.
This decrease in revenues is from our industrial drill pipe operations due to
decreased activity levels related to depressed fiber optic installation and
construction markets.

Gross Profit (Loss). Our gross profit in our other operations increased
$3.2 million, from a gross loss of $2.7 million for the six months ended June
30, 2001 to gross profit of $0.5 million for the same period in 2002. Excluding
the effects of non-recurring charges for the six months ended June 30, 2001 of
$4.0 million, gross profit decreased $0.6 million. This decrease primarily
reflects the continued deterioration of the industrial market.

Selling, General, and Administrative. Our selling, general, and
administrative expenses for our other operations decreased as a percentage of
revenues from 13% for the six months ended June 30, 2001 to 12% for the same
period in 2002. This decrease is primarily due to the closing of our
Stephenville, Texas plant in the fourth quarter of 2001.

Operating Loss. Our other operations' operating loss decreased $3.3
million, from an operating loss of $6.1 million for the six months ended June
30, 2001 to an operating loss of $2.7 million for the same period in 2002.
Excluding the effects of non-recurring charges of $4.0 million and goodwill
amortization of $0.1 million for the six months ended June 30, 2001, operating
loss increased $0.7 million. This reflects the decreased activity levels in our
industrial product line, partially offset by efficiencies obtained in our
organizational restructuring that took place in the first quarter of 2001. Also
included in our other operations for the six months ended June 30, 2002 is
approximately $1.6 million in research and development costs associated with our
two technology joint ventures as compared to $0.1 million for the same period in
2001.

32

OTHER ITEMS

Corporate General and Administrative. Our corporate selling, general and
administrative expenses increased as a percentage of revenues from 3% for the
six months ended June 30, 2001 to 4% in the same period in 2002. This increase
was due primarily to increased headcount and related expenses as we continue to
develop the infrastructure of a stand-alone public company following our
spin-off from Weatherford in April 2000.

Interest Expense. Our interest expense decreased $1.6 million for the six
months ended June 30, 2002 when compared to the same period in 2001 due to a
decrease in the interest rate related to our Credit Facility, from an average of
8.1% for the six months ended June 30, 2001 to an average of 4.5% for the same
period in 2002, and lower debt balances.

Tax (Provision) Benefit. Our effective tax rate for the six months ended
June 30, 2002 was 31% as compared to 36% for the six months ended June 30, 2001.
This decrease in the estimated effective tax rate for 2002 is due primarily to
the effects of ceasing goodwill amortization effective January 1, 2002 and a
lowering of the estimated effective tax rate for 2002 from 33% in the first
quarter of 2002 to 31% in the second quarter of 2002.

LIQUIDITY AND CAPITAL RESOURCES

Overview

At June 30, 2002, we had cash and cash equivalents of $18.9 million and
working capital of $230.1 million as compared to cash and cash equivalents of
$10.4 million and working capital of $206.2 million at December 31, 2001. At
June 30, 2002, we also had $6.4 million in restricted cash related to our 54%
interest in H-Tech that is subject to dividend and distribution restrictions.
This increase in working capital is primarily due to the decrease in our Credit
Facility balance of approximately $42.7 million offset by increased accrued
liabilities of $19.9 million, primarily associated with our acquisitions of a
controlling interest in our Chinese joint venture, Jiangsu Shuguang Grant
Prideco Tubular Limited (JSG), in March 2002 and Rotator AS (Rotator) in May
2002.

The following table summarizes our cash flows provided by operating
activities, net cash used by investing activities and net cash provided (used)
by financing activities for the periods presented (in thousands):

OPERATING ACTIVITIES

Net cash flow provided by operating activities increased by $76.3 million
for the six months ended June 30, 2002 as compared to the same period in 2001.
Changes in working capital items, which primarily includes accounts receivable,
inventories and accounts payable, net, generated $29.3 million of cash for the
six months ended June 30, 2002 as compared to using $36.7 million of cash for
the same period in 2001. Additionally, the distributions received from our
equity investment in Voest-Alpine increased from $11.5 million for the six
months ended June 30, 2001 to $16.1 million for the same period in 2002.

INVESTING ACTIVITIES

Net cash used by investing activities increased by $6.7 million for the six
months ended June 30, 2002 as compared to the same period in 2001 due primarily
to an $8.8 million increase in capital expenditures for property, plant and
equipment partially offset by net cash received from acquisitions during the six
months ended June 30, 2002.

Capital Expenditures

Our capital expenditures for property, plant and equipment totaled $13.1
million and $21.8 million for the six months ended June 30, 2001 and 2002,
respectively. We currently expect to expend approximately $20 million to $30
million for capital expenditures for

33

property, plant and equipment during the remainder of 2002 related to our
capital improvement program to reduce production costs and improve efficiencies
and to maintain the existing equipment base. However, we are reviewing our
current capital expenditures budget in light of current market conditions with
the possibility of delaying certain non-critical expenditures.

Acquisitions

On March 26, 2002, we acquired an additional 48.5% interest in JSG, a
Chinese entity engaged in the manufacture and sale of drill pipe to the Chinese
and related markets, thereby giving us a 70% controlling interest in JSG. We
paid approximately $0.5 million in cash and issued 1.3 million shares of Grant
Prideco common stock for the additional interest. Goodwill recognized in the
step acquisition of JSG was approximately $11.3 million. Subsequent to acquiring
a controlling interest, our consolidated financial statements include the
accounts of JSG.

We also have entered into a joint venture with Tianjin Pipe Company (TPCO)
for the manufacture of unfinished upset to grade pipe in China, with the intent
of this joint venture to supply JSG with all of its tubular requirements. We
currently own a 60% interest in the joint venture with TPCO and plan to invest
approximately $5 million in 2002 for machinery and equipment representing our
contribution to the joint venture. As of June 30, 2002, we have invested
approximately $2.5 million in this joint venture.

On May 7, 2002, we acquired 65% of Rotator AS (Rotator), a Norwegian
company that manufactures control valves and systems for the offshore oil and
gas industry. We have the right to acquire the remaining 35% of Rotator two
years following its purchase, with the price being based on Rotator's results of
operations during this two-year period. We issued approximately 0.3 million
shares of Grant Prideco common stock with a value of approximately $5.1 million
for the initial 65% interest. Goodwill recognized in the acquisition of Rotator
was approximately $2.7 million. The terms of the agreement also provided a
guarantee by us to the selling shareholders that they would receive 41,500,000
Norwegian Kroner (NOK) upon their disposition of the Grant Prideco common stock.
Any price deficiency would be paid in cash by us to the selling shareholders,
and any price excess would be applied towards the purchase price to be paid by
us for the additional 35% interest. In July 2002, the selling shareholders sold
the Grant Prideco common stock at a price deficiency upon disposition and we
were required to make a cash payment of $0.9 million.

FINANCING ACTIVITIES

Net cash used by financing activities was $52.2 million for the six months
ended June 30, 2002 as compared to net cash provided by financing activities of
$15.3 million for the same period in 2001. The decrease is due primarily to
repayments of borrowings on our Credit Facility.

Credit Facility and Long-Term Debt

As of June 30, 2002, we had outstanding borrowings of $11.7 million under
the Credit Facility and $3.9 million had been used to support outstanding
letters of credit. The average interest rate for the outstanding borrowings
under the Credit Facility was 5.3% at June 30, 2002.

Additionally, at June 30, 2002, there were outstanding borrowings of $0.3
million under a miscellaneous credit facility and $1.3 million of outstanding
letters of credit had been supported under various available letter of credit
facilities that are not related to the Credit Facility.

In January 2002, we made a scheduled debt payment of approximately $1.5
million related to our Voest-Alpine debt, and in June 2002 we received a
distribution from Voest-Alpine in the amount of $16.1 million, of which $4.4
million was applied towards our remaining Voest-Alpine debt, and as a result,
the debt was paid in full.

We estimate our required principal and interest payments for our
outstanding debt to be approximately $11.5 million for the remainder of 2002. We
currently expect to satisfy all required capital expenditures and debt service
requirements during the remainder of 2002 from operating cash flows, existing
cash balances and our Credit Facility. Acquisitions and expansions will be
financed from cash flow from operations, borrowings under our Credit Facility,
or through a combination of the issuance of equity and debt financing.

34

Other Commitments

As part of our agreement to invest in Voest-Alpine, we entered into a
four-year supply contract with Voest-Alpine under which we have agreed to
purchase a minimum of 60,000 metric tons of "green" tubulars per year through
September 2003. The volume requirements represent approximately half of our
normal worldwide requirements for this type of tubulars. Because this agreement
requires us to purchase tubulars regardless of our needs, our purchases under
this agreement may be made for inventory during periods of low customer demand.
These types of purchases would require us to use our working capital and expose
us to risks of excess inventory during those periods. Although these purchases
could require us to expend a material amount of money, we expect that we will be
able to eventually use or sell all of the tubular products we are required to
purchase from Voest-Alpine.

TAX MATTERS

As a result of our spinoff from Weatherford, subsequent to April 14, 2000
we are no longer able to combine the results of our operations with those of
Weatherford in reporting income for United States federal income tax purposes
and for income tax purposes in some states and foreign countries. Under the
terms of a tax allocation agreement with Weatherford, we will not have the
future benefit of any prior tax losses or benefits incurred as part of a
consolidated return with Weatherford. Moreover, we will be liable to Weatherford
for any corporate level taxes incurred by Weatherford as a result of the
spinoff, except to the extent the taxes arise solely as a result of a change of
control of Weatherford. We believe this will not have a material adverse effect
on our earnings.

RECENT ACCOUNTING PRONOUNCEMENTS

For recent accounting pronouncements, see Notes 7, 8 and 11 to the
unaudited consolidated financial statements included herein.

FORWARD-LOOKING STATEMENTS AND EXPOSURES

In light of the SEC's Regulation FD, we have elected to provide in this
report various forward-looking statements and operational details. These
expectations reflect only our current view on these matters and are subject to
change based on changes of facts and circumstances. There can be no assurance
that these expectations will be met and our actual results will likely vary (up
or down) from those currently projected. These estimates speak only of our
expectations as of the date of this report, and we make no undertaking to update
this information. The absence of an update should not be considered as an
affirmation of our current expectations or that facts have not changed during
the quarter that would impact our expectations.

In modeling our earnings for 2002, we have made numerous assumptions
regarding our operations. Although we believe that these assumptions are
reasonable, there can be no assurance that they will be correct in the future.
Material assumptions regarding our operations include the following:

o North American rig counts will average 860 during the third quarter of
2002 and 950 during the fourth quarter of 2002 and will increase
throughout this period and during 2003. More significantly, our
customers expectations during the third and fourth quarter will be for
rig counts to continue to increase and that this will cause North
American land drillers to begin placing new drill pipe orders at
increasing rates and OCTG distributors to begin increasing order rates
to replenish and expand their inventories.

o International drilling activity and rig counts and international
demand for our drill stem products will continue to be relatively
strong throughout the remainder of 2002.

o We will not experience any material unusual losses, expenses, or
charges associated with litigation, warranty claims, environmental
matters, property losses or inventory write-downs. Our manufacturing
operations will not experience any material disruptions in production,
supply or efficiencies.

o There will not be any material acquisitions or divestments during the
year. Although we have made this assumption for modeling purposes, we
do expect that some acquisitions and divestments will be made during
the year that will affect our projections.

o Our completion of the first step of the SFAS No. 142 transitional
goodwill impairment test indicated the carrying value of the
Industrial reporting unit exceeded its fair value, and we will be
required to perform the second step of the impairment test for

35

this reporting unit by December 31, 2002. The total amount of goodwill
related to the Industrial reporting unit is approximately $11 million.
We are closely reviewing this goodwill to determine whether all or
part of this amount should be written-off. Once the impairment charge
is determined, it will be treated as a non-cash charge and will be
recorded as a cumulative effect of a change in accounting principle.

In addition to the foregoing assumptions, investors should carefully
consider the following risks, uncertainties and assumptions when evaluating our
company and the forward-looking statements that we make:

A DECLINE IN OIL AND GAS PRICES OR STAGNATION OR DECREASE IN DOMESTIC AND
WORLDWIDE DRILLING ACTIVITY WOULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS AND OUR PROJECTED RESULTS.

Our business is materially dependent on the level of drilling activity in
North America and worldwide, which in turn depends primarily on prices for oil
and natural gas. Prices for oil and natural gas are very volatile and subject to
numerous risks outside of our control, including actions by OPEC countries and
other oil producing nations and the North American and worldwide economies.

Our projections and forward-looking statements assume steady and significant
increases in the North American rig count and a relatively strong international
rig count, and assume that both North American land drillers and OCTG
distributors will increase purchases during the remainder of the year. If oil
and natural gas prices decline such that North American drilling does not
increase in line with our expectations or international rig counts do not remain
strong, our projections and results of operations could be adversely affected.

AN ECONOMIC DOWNTURN COULD ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS AND
SERVICES AND OUR PROJECTED RESULTS OF OPERATIONS.

Demand for oil and natural gas is influenced by numerous factors, including
the North American and worldwide economies as well as activities of OPEC. Our
forward-looking statements and earnings assume that recent improvements in the
domestic economy will continue so that the United States economy will improve
during the year in such a manner that natural gas inventory levels rationalize,
and demand and prices improve, which will positively impact our customers'
expectations regarding rig counts and demand for our products and services
during the second half of 2002. We also have assumed that international
economies also will remain stable or improve slightly. If international economic
conditions decline unexpectedly, our projections, results of operations, and
financial condition could be materially adversely affected.

OUR ABILITY TO MEET OUR EARNINGS AND REVENUES GOALS ARE BASED IN PART UPON
OUR ASSUMPTION THAT DRILLING CONTRACTORS, IN PARTICULAR, U.S. LAND DRILLING
CONTRACTORS, ARE NOT HOLDING SIGNIFICANT EXCESS LEVELS OF DRILL PIPE
INVENTORY IN RELATION TO THEIR ANTICIPATED FUTURE NEEDS THAT WILL ADVERSELY
AFFECT THEIR PURCHASING DECISIONS.

In addition to changes in oil and gas prices and rig counts, demand for
drill pipe is significantly impacted by the amount of drill pipe inventory held
by drilling contractors. Our projections assume that drilling contractors, and
in particular, North American land contractors, are not holding substantial
amounts of excess drill pipe inventory in relation to their anticipated future
needs, and that as rig counts increase, these contractors will need to purchase
new drill pipe in order to stock their rig fleet and maintain normalized
inventory levels. This assumption is particularly relevant with respect to the
remainder of 2002, as we are entering this period with a relatively small
backlog such that our projected results are highly dependent upon our ability to
obtain and complete new drill pipe orders during both the third and fourth
quarters of 2002. If anticipated new orders do not occur as a result of
customers' excess inventory levels, it could have a material adverse affect on
our results of operations and projected results.

OUR ABILITY TO MEET EARNINGS AND REVENUE GOALS ARE BASED IN PART UPON OUR
ASSUMPTION THAT OCTG DISTRIBUTORS DO NOT HAVE EXCESS INVENTORY THAT WILL
ADVERSELY AFFECT THEIR PURCHASING DECISIONS DURING THE SECOND HALF OF 2002.

In addition to changes in oil and gas prices and rig counts, demand for our
premium connections and tubular products is significantly impacted by inventory
levels held by OCTG distributors. Our projections assume that OCTG distributors
will increase purchases during the second half of 2002 in line with increases in
the North American rig count and that revenues and profitability in our Premium
Connections and Tubular Products segment will increase in line with these
increases. We have assumed that distributor purchasing decisions will not be
adversely affected by excess inventory levels. To the extent these distributors
perceive themselves to be holding excess inventories, demand for our products
and our projected results will be adversely affected.

OUR ABILITY TO MEET OUR EARNINGS GOALS ARE BASED IN PART UPON OUR ABILITY
TO SUCCESSFULLY INCREASE AND DECREASE OUR MANUFACTURING CAPACITY IN
RESPONSE TO CHANGES IN DEMAND WITHOUT MATERIAL DISRUPTION OR MANUFACTURING
INEFFICIENCIES.

We have recently taken steps to increase our manufacturing capacity and
reduce manufacturing costs in all of our manufacturing operations. These
activities are ongoing and will continue through 2002. Our manufacturing goal is
to be able to produce between 1.5 million and 2.5 million feet of drill pipe
during a quarter (outside of China) with little operational changes or
disruption. We also intend to be able to increase our production to up to 3.0
million feet a quarter (outside of China) without significant operational
disruptions and process inefficiencies. Our forward-looking statements regarding
our results of operations during 2002 assume that we will be able to increase
our production during the second half of the year with minimal operational
disruption and inefficiency in order to meet the increased demand that we
currently assume will occur during that period. If there are any material
disruptions or excess costs associated with the manufacturing changes and our
ability to reduce and increase production with minimal disruption, our results
of operations during 2002 could be materially adversely affected.

36

OUR ABILITY TO MEET EARNINGS AND REVENUE GOALS FOR 2002 IS BASED UPON OUR
ABILITY TO MAINTAIN PRICES FOR OUR DRILL STEM PRODUCTS, WHICH CAN BE
ADVERSELY AFFECTED BY CHANGES IN INDUSTRY CONDITIONS AND COMPETITIVE
FORCES.

Beginning in 2001, we initiated substantial price increases for our drill
stem products, which began benefiting revenues and operating profit during the
third quarter of 2001. Our ability to maintain these price increases are subject
to various risks, including adverse changes in industry conditions and
regulations, as well as actions by our competitors. Product mix will also impact
pricing. We believe our prices are now at realistic market levels, and we do not
expect to see any material price declines during the remainder of 2002. If
market conditions or other factors cause us to decrease prices, our projections
and results could be materially adversely affected.

OUR ABILITY TO MEET EARNINGS AND REVENUE GOALS FOR 2002 IS BASED UPON OUR
ABILITY TO INCREASE OUR MARKET SHARE AND EFFICIENCIES FOR OUR MARINE
PRODUCTS AND SERVICES PRODUCT LINES.

We recently reorganized our marine segment with the objective of increasing
market share and profitability of our current product lines and growing the
segment through the acquisition of complementary businesses, products, and
services. Our projections and forward-looking statements assume that we will
increase this segment's revenues and operating efficiencies during the remainder
of 2002. Any failure to do so could have a material adverse affect upon our
projections and results of operations.

OUR INTERNATIONAL OPERATIONS MAY EXPERIENCE SEVERE INTERRUPTIONS DUE TO
POLITICAL, ECONOMIC, OR OTHER RISKS, WHICH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

During the first half of 2002, we derived approximately 16% of our total
revenues from our facilities outside the United States. In addition, a large
part of our sales from our domestic locations were for use in foreign countries.
Our expectations for the remainder of 2002 depend on our ability to maintain our
international sales while domestic demand begins the improvement we expect to
occur during the remainder of 2002. In addition, many of our key manufacturing
operations are outside of the United States. Our operations in certain
international locations, including Mexico, Austria, Italy, China, and Indonesia,
are subject to various political and economic conditions existing in those
countries that could disrupt operations. These risks include:

o currency fluctuations and devaluations,

o currency restrictions and limitations on repatriation of profits, and

o political instability.

Our foreign operations may suffer disruptions and we may incur losses that
will not be covered by insurance. In particular, the September 11th terrorist
attacks and resulting United States military activity in Afghanistan or
elsewhere increase the possibility that our operations could be interrupted or
adversely affected. Such disruption could include our inability to timely and
cost effectively ship products, an inability to place contractors and employees
in various countries or regions, evacuations, or similar disruptions.

Any material currency fluctuations, devaluations, or political events that
disrupt oil and gas exploration and production or the movement of funds and
assets to and from our international operations could materially adversely
affect our results of operations, financial condition and projected results.

OUR LONG-TERM SUPPLY CONTRACT WITH VOEST-ALPINE MAY OBLIGATE US TO PURCHASE
UNNEEDED MATERIALS, AND A STRENGTHENING OF THE EURO AGAINST THE U.S. DOLLAR
WOULD MAKE THOSE MATERIALS MORE EXPENSIVE TO US AND ADVERSELY AFFECT OUR
PROJECTED RESULTS.

We have entered into an agreement with Voest-Alpine, an entity of which we
own 50.01%, to purchase 60,000 metric tons of raw materials per year through
September 2003. Our future results could be adversely affected if we are unable
to use or resell these tubulars. In addition, we have agreed to be responsible
for paying any "anti-dumping" duties in the United States on the resale of these
tubulars, which could affect our ability to resell the tubulars in the United
States. Further, our long-term supply contract with Voest-Alpine is denominated
in Euros. We have no significant offsetting revenues in Euros, and we currently
have no hedges in place against the contract. Our manufacturing of tool joints
in Italy has benefited from a weak Euro against the dollar. Thus, a material
strengthening of the Euro versus the U.S. dollar could materially adversely
affect our results of operations.

37

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

Many of our products are used in hazardous drilling and production
applications where an accident or a failure of a product can cause personal
injury, loss of life, damage to property, equipment, or the environment, as well
as the suspension of the end-user's operations. If our products were to be
involved in any of these difficulties, we could face litigation and may be held
liable for those losses. Our insurance coverage may not be adequate in risk
coverage or policy limits to cover all losses or liabilities that we may incur.
Moreover, we may not be able in the future to maintain insurance at levels of
risk coverage or policy limits that we deem adequate or at a reasonable prices.
Any claims made under our policies likely will cause our premiums to increase.
Any future damages deemed to be caused by our products or services that are not
covered by insurance, or that are in excess of policy limits or subject to
substantial deductibles, could have a material adverse effect on our financial
condition, results of operations, and projected results.

WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY LAWS AND REGULATIONS
THAT EXPOSE US TO POTENTIAL FINANCIAL LIABILITY THAT COULD ADVERSELY AFFECT
OUR PROJECTED RESULTS OF OPERATIONS.

Our operations are regulated under a number of federal, state, local, and
foreign environmental laws and regulations, which govern, among other things,
the discharge of hazardous materials into the air and water as well as the
handling, storage, and disposal of hazardous materials. Compliance with these
environmental laws is a major consideration in the manufacturing of our
products, as we use and generate hazardous substances and wastes in our
manufacturing operations, and we may be subject to material financial liability
and clean-up of such hazardous materials. In addition, many of our current and
former properties are, or have been, used for industrial purposes. Accordingly,
we also may be subject to financial liabilities and remediation of hazardous
materials resulting from the action of previous owners or operators of
industrial facilities on those sites. Liability in many instances may be imposed
on us regardless of the legality of the original actions relating to the
hazardous or toxic substances or whether or not we knew of, or were responsible
for, the presence of those substances. We are also subject to various federal,
state, local and foreign laws and regulations relating to safety and health
conditions in our manufacturing facilities. Those laws and regulations may also
subject us to material financial penalties or liabilities for any noncompliance,
as well as potential business disruption if any of our facilities or a portion
of any facility is required to be temporarily closed as a result of any
violation of those laws and regulations. Any such financial liability or
business disruption could have a material adverse effect on our financial
condition, results of operations, and projected results.

OUR PROJECTIONS AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY
ACTIONS UNDER U.S. TRADE LAWS AND ACTIONS BY OUR FOREIGN COMPETITORS.

Although we are a U.S.-based manufacturing company, we do own and operate
international manufacturing operations that support our U.S.-based business. If
actions under U.S. trade laws were instituted that limited our access to these
products, our ability to meet our customer specifications and delivery
requirements would be reduced. Our forward-looking statements assume there will
be no adverse effects on our ability to import from our foreign subsidiaries.
Any result to the contrary could have a material adverse affect on our
projections and results of operations.

In addition, operations within our Premium Connections and Tubular Products
segment benefit from anti-dumping duties covering OCTG imports from Argentina,
Mexico, Italy and Japan, which limit the ability of steel mills operating in
those countries to import OCTG products into the United States. The threat of
future anti-dumping suits also causes many of our other foreign OCTG competitors
from importing large quantities of OCTG into the United States. Our
forward-looking statements assume that there will be no material changes in the
competitive landscape for OCTG products as a result of changes in anti-dumping
duty orders or laws or our foreign competitors perceptions regarding these laws.

WE COULD BE SUBJECT TO ADDITIONAL EXPENSES FROM THE WATTS LITIGATION.

As noted under Item 3. Legal Proceedings in our Annual Report on Form 10-K,
we have recorded an additional reserve as a result of a jury verdict in
litigation involving Mr. John D. Watts and our XL Systems(TM) subsidiary. We
currently are appealing the verdict against XL Systems(TM), and Mr. Watts is
appealing the trial courts determination to reduce the jury verdict and deny
enhanced damages and to grant summary judgment on certain trade secret claims
made by Mr. Watts. If the appellate court rules in favor of Mr. Watts, on one or
more of these issues, it may be necessary for us to record an additional
reserve, which could be material.

38

ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES

FINANCIAL INSTRUMENTS

We are currently exposed to certain market risks arising from transactions
that we enter into in the normal course of business. These risks relate to
fluctuations in foreign currency exchange rates and changes in interest rates.
Refer to Note 7 to the financial statements included elsewhere in this Quarterly
Report on Form 10-Q for additional information on financial instruments.

FOREIGN CURRENCY RISK

The functional currency for most of our international operations is the
applicable local currency. Results of operations for foreign subsidiaries with
functional currencies other than the U.S. dollar are translated using average
exchange rates during the period. Assets and liabilities of these foreign
subsidiaries are translated into U.S. dollars using the exchange rates in effect
at the balance sheet date, and the resulting translation adjustments are
included in stockholders' equity. However, foreign currency transaction gains
and losses are reflected in income for the period. We partially hedge our
exposure to changes in foreign exchange rates principally with forward
contracts.

Forward contracts designated as hedges of foreign currency transactions are
marked to the forward rate with the resulting gains and losses recognized in
earnings, offsetting losses and gains on the transactions hedged. We enter into
foreign exchange contracts only as a hedge against existing economic exposures
and not for speculative or trading purposes. The counterparties to our foreign
exchange contracts are creditworthy multinational commercial banks. We believe
that the risk of counterparty nonperformance is immaterial.

At June 30, 2002, we had open forward contracts and call options to
exchange U.S. dollars for Euros at a net fair value of approximately ($0.2)
million. A 10% change in the forward rate of Euros subsequent to June 30, 2002
would have a minimal effect on the fair value of the open forward contracts and
call options.

INTEREST RATES

We are and will be subject to market risks for changes in interest rates
related primarily to our long-term debt. Excluding the Senior Notes, most of our
borrowings are at variable rates, which reflect current market rates, and
therefore the fair value of these borrowings approximates book value. Based upon
our debt balances, an immediate change of 1% in the interest rate would not
cause a material change in interest expense on an annual basis. The fair value
of financial instruments which differed from their carrying value at June 30,
2002 was as follows:

Currently, we have variable interest rate debt totaling approximately $12.0
million for amounts borrowed under our Credit Facility and other miscellaneous
short-term credit facilities. These variable rate debts expose us to the risk of
increased interest expense in the event of increases in short-term interest
rates. If the variable interest rate were to increase by 1% from June 2002
levels, our interest expense would increase by a total of approximately $120,000
annually. The carrying value of the Credit Facility and other miscellaneous
credit facilities approximates fair value as they bear interest at current
market rates.

39

PART II

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On May 7, 2002, the Company acquired 65% of Rotator AS (Rotator), a
Norwegian company that manufactures control valves and systems for the
offshore oil and gas industry. The Company issued approximately 0.3
million shares of Grant Prideco common stock with a value of approximately
$5.1 million for the initial 65% interest. Goodwill recognized in the
acquisition of Rotator was approximately $2.7 million. The shares were initially
issued pursuant in a private placement pursuant to Section 4(2) of the
Securities Act of 1933.

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

On June 27, 2002, the Company convened its 2002 Annual Meeting of
Stockholders for the purpose of electing new directors of the Company. As a
result of the appointment on June 24, 2002 of Michael McShane to the offices of
Chief Executive Officer and President of the Company and as a Director, in
replacement of Curtis W. Huff, the stockholders of the Company voted to adjourn
and reconvene the 2002 Annual Meeting on August 28, 2002, at which time the
stockholders would finalize the vote on the Company's Directors. The following
summarizes the voting relating to the adjournment of the meeting (there were
no votes withheld, broker non-votes or abstentions in connection with this
adjournment):

Shareholders of Record: 110,765,260
Votes in favor of reconvening meeting: 100,778,280
Votes against reconvening meeting: --

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

a. 10.1 Employment Agreement with Mike McShane dated June 26, 2002

b. 99.1 Certification by Chief Executive Officer

c. 99.2 Certification by Chief Financial Officer

(b) The following reports on Form 8-K were filed during the three months
ended June 30, 2002:

a. Current Report on Form 8-K dated May 2, 2002, filing the
Company's press release relating to its first quarter 2002
results of operations.

b. Current Report on Form 8-K dated June 24, 2002, reporting the
appointment of Mike McShane as Chief Executive Officer and
President and Director of the Company.

40

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

GRANT PRIDECO, INC.

By: /s/ LOUIS A. RASPINO
-------------------------------------------
Louis A. Raspino*
Vice-President and Chief Financial Officer

By: /s/ GREG L. BOANE
------------------------------------------
Greg L. Boane*
Corporate Controller
(Principal Accounting Officer)

* Also signing on behalf of each of the
additional registrants.

Date: August 14, 2002

41

EXHIBIT INDEX

Exhibit
No. Description
------- -----------
10.1 Employment Agreement with Mike McShane dated June 26, 2002

99.1 Certification by Chief Executive Officer

99.2 Certification by Chief Financial Officer